Pricing longevity risk with the parametric bootstrap: A maximum entropy approach
AbstractIn recent years, there has been significant development in the securitization of longevity risk. Various methods for pricing longevity risk have been proposed. In this paper we present an alternative pricing method, which is based on the maximization of the Shannon entropy in physics. Specifically, we propose implementing this pricing method with the parametric bootstrap (Brouhns et al., 2005), which is highly flexible and can be performed under different model assumptions. Through this pricing method we also quantify the impact of cohort effects and parameter uncertainty on prices of mortality-linked securities. Numerical illustrations based on longevity bonds with different maturities are provided.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 47 (2010)
Issue (Month): 2 (October)
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Web page: http://www.elsevier.com/locate/inca/505554
Canonical valuation Cohort effects Mortality-linked securities The Cairns-Blake-Dowd model The Lee-Carter model;
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