Locally risk-minimizing hedging strategies for unit-linked life insurance contracts under a regime switching Lévy model

This paper extends the model and analysis in that of Vandaele and Vanmaele [Insurance: Mathematics and Economics, 2008, 42: 1128-1137]. We assume that parameters of the Lévy process which models the dynamic of risky asset in the financial market depend on a finite state Markov chain. The state of the Markov chain can be interpreted as the state of the economy. Under the regime switching Lévy model, we obtain the locally risk-minimizing hedging strategies for some unit-linked life insurance products, including both the pure endowment policy and the term insurance contract.