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Title:The Effects of Multifactor Term Structure Models on the Valuation of Insurance
Author(s):Ahlgrim, Kevin C.
Doctoral Committee Chair(s):D'Arcy, Stephen P.
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Finance
Abstract:This research investigates the importance of the underlying assumption of interest rate movements when valuing insurance. Movements in interest rates affect the present value of both property-liability and life insurance obligations. One approach to understanding the amount of interest rate risk inherent to insurers is to perform a financial analysis that incorporates a stochastic model of interest rate changes. Many of these term structure models use only one stochastic variable to project the path of future interest rates. The benefit of one-factor models is that they are simpler to use than multi-factor approaches. This research investigates the importance of incorporating a second stochastic factor in the financial analysis of an insurance company to determine if there are any effects on interest rate risk. Three applications are considered: (1) options on Eurodollar futures contracts, (2) dynamic financial analysis of property-liability insurance, and (3) whole life insurance. The approach of this study is to compare the results of the analysis under both a one- and a two-factor Hull-White term structure model and investigate the uncertainty under the alternative interest rate distributions. The objective of this dissertation is to determine if a more complex term structure model is required to capture the actual interest rate risk of insurance.
Issue Date:2001
Description:191 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2001.
Other Identifier(s):(MiAaPQ)AAI3017012
Date Available in IDEALS:2015-09-28
Date Deposited:2001

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