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A step-by-step guide to building two-population stochastic mortality models

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  • Li, Johnny Siu-Hang
  • Zhou, Rui
  • Hardy, Mary

Abstract

Two-population stochastic mortality models play a crucial role in the securitization of longevity risk. In particular, they allow us to quantify the population basis risk when longevity hedges are built from broad-based mortality indexes. In this paper, we propose and illustrate a systematic process for constructing a two-population mortality model for a pair of populations. The process encompasses four steps, namely (1) determining the conditions for biological reasonableness, (2) identifying an appropriate base model specification, (3) choosing a suitable time-series process and correlation structure for projecting period and/or cohort effects into the future, and (4) model evaluation.

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  • Li, Johnny Siu-Hang & Zhou, Rui & Hardy, Mary, 2015. "A step-by-step guide to building two-population stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 121-134.
    • Handle: RePEc:eee:insuma:v:63:y:2015:i:c:p:121-134
    DOI: 10.1016/j.insmatheco.2015.03.021
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