Asset Returns from a Distance-Based Random Partition Model

Authors

Richard D. Payne, Brigham Young University
David B. Dahl, Brigham Young University
Brian M. Hartman, Brigham Young University

Keywords

asset returns, insurance product, partition model, value

College

Physical and Mathematical Sciences

Department

Statistics

Abstract

When pricing an insurance product, many factors a ect market returns. Policyholder behavior (lapses, mortality, morbidity, etc.), policy riders (guarantees, look-backs, ratchets, etc.), industry and government forces (competition and regulation), among others can all depend on the asset returns and a ect the total risk exposure from the market. In these complicated settings, an analytical solution is often unavailable and the asset returns will need to be simulated. Regime- switching models are important in nance and actuarial science because they are often successful in simulating asset returns. These models t the complicated nature of market risk exposure more e ectively and naturally than other models. Although regime-switching models have been successful, we propose a more exible model that clusters data based on both the value of the data as well as its temporal proximity to other observations.

Recommended Citation

Payne, Richard D.; Dahl, David B.; and Hartman, Brian M. (2014) "Asset Returns from a Distance-Based Random Partition Model," Journal of Undergraduate Research: Vol. 2014: Iss. 1, Article 1284.
Available at: https://scholarsarchive.byu.edu/jur/vol2014/iss1/1284