Abstract

This dissertation explores the importance of interest rate modeling in finance and actuarial science. It emphasizes the significance of yield curve modeling in pricing financial instruments, such as participating life insurance contracts and swaptions. The dissertation extends the work of previous studies and proposes a slightly different version of the discrete-time arbitrage-free Nelson-Siegel model (DTAFNS), providing a closed-form expression for risk-free spot rates and demonstrating its superior out-of-sample predictive ability. Additionally, the dissertation focuses on stochastic interest rates and mortality dynamics' impact on the pricing, reserving, and risk measurement approaches of participating life insurance contracts, with the introduction of a shadow reserve to improve accuracy. Lastly, the dissertation outlines procedures for pricing swaptions under the DTAFNS model. Overall, this dissertation contributes to the stability of the financial sector and protecting the financial well-being of individuals and institutions.