In this article, an extensive study of the no-arbitrage fee for Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity riders is carried out. Taking into account such contractual features as the separation of mutual fund fees and the fees earmarked for hedging the guarantee, as well as the possibility of jumps in the value of the underlying asset, increases the value of the GMWB guarantee considerably. We also explore the effects of various modelling assumptions on the optimal withdrawal strategy of the contract holder, as well as the impact on the guarantee value of sub-optimal withdrawal behaviour. Our general conclusions are that only if several unrealistic modelling assumptions are made is it possible to obtain GMWB fees in the same range as is normally charged. In all other cases, it would appear that typical fees are not enough to cover the cost of hedging these guarantees.
Recently, Chen, Vetzal and Forsyth REF studied the impact of optimal "withdrawal" strategies as well as jump risks in the context of GMWB.
The Effect of Modelling Parameters on the Value of GMWB Guarantees
Economics