On the free boundary of an annuity purchase Article Swipe
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· 2018
· Open Access
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· DOI: https://doi.org/10.1007/s00780-018-00379-8
· OA: W2739959273
It is known that the decision to purchase an annuity may be associated to an\noptimal stopping problem. However, little is known about optimal strategies, if\nthe mortality force is a generic function of time and if the `subjective' life\nexpectancy of the investor differs from the `objective' one adopted by\ninsurance companies to price annuities. In this paper we address this problem\nconsidering an individual who invests in a fund and has the option to convert\nthe fund's value into an annuity at any time. We formulate the problem as a\nreal option and perform a detailed probabilistic study of the optimal stopping\nboundary. Due to the generic time-dependence of the mortality force, our\noptimal stopping problem requires new solution methods to deal with\nnon-monotonic optimal boundaries.\n