Journal Article

Market Regime Identification and Variable Annuity Pricing: Analysis of COVID-19-Induced Regime Shifts in the Indian Stock Market

Sarfraz, Mohammad, Selvamuthu, Dharmaraja, D’Amico, Guglielmo

2025

Overview

Understanding how crises like the COVID-19 pandemic affect variable annuity pricing is crucial, especially in emerging markets like India. The motivation is that financial stability and risk management in these markets depend heavily on accurate pricing models. While prior research has primarily focused on Western markets, there is a significant gap in analyzing the impact of extreme volatility and regime-dependent dynamics on variable annuities in emerging economies. This study investigates how regime shifts during the COVID-19 pandemic influence variable annuity pricing in the Indian stock market, specifically using the Nifty 50 Index data from 7 September 2017 until 7 September 2023. Advanced methodologies, including regime-switching hidden Markov models, artificial neural networks, and Monte Carlo simulations, were applied to analyze pre- and post-COVID-19 market behavior. The regime-switching hidden Markov models effectively capture latent market regimes and their transitions, which traditional models often overlook, while neural networks provide flexible functional approximations that enhance pricing accuracy in highly non-linear environments. The Expectation–Maximization (EM) algorithm was employed to achieve robust calibration and enhance pricing accuracy. The analysis showed significant pricing variations across market regimes, with heightened volatility observed during the pandemic. The findings highlight the effectiveness of regime-switching models in capturing market dynamics, particularly during periods of economic uncertainty and turbulence. This research contributes to the understanding of variable annuity pricing under regime-dependent dynamics in emerging markets and offers practical implications for improved risk management and policy formulation.

• Publisher: MDPI AG
• Subject: Accuracy / Algorithms / Artificial neural networks / Brownian motion / calibration / COVID-19 / Diffusion models / Economic conditions / EM algorithm / Emerging markets / Epidemics / Equity funds / Hedging / hidden Markov model / Impact analysis / India / Investments / Life insurance / Machine learning / Markov analysis / Markov chains / Markov processes / Monte Carlo / Monte Carlo method / Monte Carlo simulation / Pandemics / Pricing / regime switching / Risk management / Securities markets / Simulation methods / Skewness / Stock exchanges / Stock markets / Stock prices / Stocks / Time series / Tourism / Valuation / Variable annuities / variable annuity pricing / Virginia / Volatility