New articles on q-fin

[1] 2008.03123

Pricing foreseeable and unforeseeable risks in insurance portfolios

In this manuscript we propose a method for pricing insurance products that cover not only traditional risks, but also unforeseen ones. By considering the Poisson process parameter to be a mixed random variable, we capture the heterogeneity of foreseeable and unforeseeable risks. To illustrate, we estimate the weights for the two risk streams for a real dataset from a Portuguese insurer. To calculate the premium, we set the frequency and severity as distributions that belong to the linear exponential family. Under a Bayesian setup , we show that when working with a finite mixture of conjugate priors, the premium can be estimated by a mixture of posterior means, with updated parameters, depending on claim histories. We emphasise the riskiness of the unforeseeable trend, by choosing heavy-tailed distributions. After estimating distribution parameters involved using the Expectation-Maximization algorithm, we found that Bayesian premiums derived are more reactive to claim trends than traditional ones.

[2] 2008.03204

Log-modulated rough stochastic volatility models

We propose a new class of rough stochastic volatility models obtained by modulating the power-law kernel defining the fractional Brownian motion (fBm) by a logarithmic term, such that the kernel retains square integrability even in the limit case of vanishing Hurst index $H$. The so-obtained log-modulated fractional Brownian motion (log-fBm) is a continuous Gaussian process even for $H = 0$. As a consequence, the resulting super-rough stochastic volatility models can be analysed over the whole range $0 \le H < 1/2$ without the need of further normalization. We obtain skew asymptotics of the form $\log(1/T)^{-p} T^{H-1/2}$ as $T\to 0$, $H \ge 0$, so no flattening of the skew occurs as $H \to 0$.

[3] 2008.03283

COVID-19: What If Immunity Wanes?

Using a simple economic model in which social-distancing reduces contagion, we study the implications of waning immunity for the epidemiological dynamics and social activity. If immunity wanes, we find that COVID-19 likely becomes endemic and that social-distancing is here to stay until the discovery of a vaccine or cure. But waning immunity does not necessarily change optimal actions on the onset of the pandemic. Decentralized equilibria are virtually independent of waning immunity until close to peak infections. For centralized equilibria, the relevance of waning immunity decreases in the probability of finding a vaccine or cure, the costs of infection (e.g., infection-fatality rate), and the presence of other NPIs that lower contagion (e.g., quarantining and mask use). In simulations calibrated to July 2020, our model suggests that waning immunity is virtually unimportant for centralized equilibria until at least 2021. This provides vital time for individuals and policymakers to learn about immunity against SARS-CoV-2 before it becomes critical.