Variance-minimal hedging under model risk - A discrete-time approach

We consider (insurance-linked) products where the timing of the payoff depends on a (mortality) model which is independent of the interest rate model. With respect to the combined model (interest rate and mortality model), there exists a whole class of risk-minimizing hedging strategies if the interest rate model is complete. This is explained by the fact that some of the bonds which are needed for hedging can be replaced by a synthesizing strategy in other bonds. However, under model risk (wrong model assumptions), the effectiveness of the (intentionally) risk-minimizing hedging strategies depends on the set of hedging instruments. This result highlights the importance of a suitable choice of the combined (hedging) model to achieve a robust hedging strategy.