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Pricing and securitization of multi-country longevity risk with mortality dependence

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  • Yang, Sharon S.
  • Wang, Chou-Wen
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    Abstract

    To deal with multi-country longevity risk, this article investigates the long-run equilibrium of mortality rates and introduces mortality correlations across countries as a means for pricing a multi-country longevity bond. The examination of the long-run equilibrium of the mortality rate relies on co-integration analysis, and a vector error correction model (VECM) is proposed for mortality forecasts. Mortality correlations among different countries under a VECM model are then derived. We take into account the mortality correlations across countries and utilize the multivariate Wang transform to derive the valuation formula for pricing the longevity bonds, with payoffs based on a combined weighted mortality index. This study illustrates the pattern of mortality correlations for men and women in the US and the UK, according to the Human Mortality Database. Our results show that mortality correlations across countries have a significant impact on pricing longevity bonds.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712001187
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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 52 (2013)
    Issue (Month): 2 ()
    Pages: 157-169

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    Handle: RePEc:eee:insuma:v:52:y:2013:i:2:p:157-169

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: Lee–Carter model; Mortality correlation; Longevity bond; Multivariate Wang transform; Co-integration analysis; VECM model;

    References

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    Cited by:
    1. Wong, Tat Wing & Chiu, Mei Choi & Wong, Hoi Ying, 2014. "Time-consistent mean–variance hedging of longevity risk: Effect of cointegration," Insurance: Mathematics and Economics, Elsevier, vol. 56(C), pages 56-67.

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