tailieunhanh - Pricing and performance of mutual funds: lookback versus interest rate guarantees

The aim of this paper is to compare pricing and performance of mutual funds with two types of guarantees: a lookback guarantee and an interest rate guarantee. In a simulation analysis of different portfolios based on stock, bond, real estate and money market indexes, we first calibrate guarantee costs to be the same for both investment guarantee funds. Second, their performance is contrasted, measured with the Sharpe ratio, omega and Sortino ratio, and a test with respect to first-, second- and third-order stochastic dominance is provided. We further investigate the impact of the underlying fund’s strategy, first looking at a conventional fund having a constant average rate of return. | The Journal of Risk 31-49 Volume 11 Number 4 Summer 2009 Pricing and performance of mutual funds lookback versus interest rate guarantees Nadine Gatzert Institute of Insurance Economics University of St. Gallen Kirchlistr. 2 CH-9010 St. Gallen Switzerland email Hato Schmeiser Institute of Insurance Economics University of St. Gallen Kirchlistr. 2 CH-9010 St. Gallen Switzerland email The aim of this paper is to compare pricing and performance of mutual funds with two types of guarantees a lookback guarantee and an interest rate guarantee. In a simulation analysis of different portfolios based on stock bond real estate and money market indexes we first calibrate guarantee costs to be the same for both investment guarantee funds. Second their performance is contrasted measured with the Sharpe ratio omega and Sortino ratio and a test with respect to first- second- and third-order stochastic dominance is provided. We further investigate the impact of the underlying fund s strategy first looking at a conventional fund having a constant average rate of return and standard deviation over the contract term and then at a constant proportion portfolio insurance managed fund. This analysis is intended to provide insights for investors with different riskreturn preferences regarding the interaction of guarantee costs and the performance of different mutual funds with embedded investment guarantees. 1 INTRODUCTION In recent years there has been an increasing demand for investment products with financial guarantees. For example sales of unit-linked life insurance products have seen substantial These contracts are typically mutual funds with investment guarantees that additionally offer term insurance. Thus the maturity payout depends on the performance of the underlying fund. From the investors perspective these mutual fund products are generally attractive due to the possibility of participating in positive market .