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A more meaningful parameterization of the Lee–Carter model

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  • de Jong, Piet
  • Tickle, Leonie
  • Xu, Jianhui

Abstract

A new Lee–Carter model parameterization is introduced with two advantages. First, the Lee–Carter parameters are normalized such that they have a direct and intuitive interpretation, comparable across populations. Second, the model is stated in terms of the “needed-exposure” (NE). The NE is the number required in order to get one expected death and is closely related to the “needed-to-treat” measure used to communicate risks and benefits of medical treatments. In the new parameterization, time parameters are directly interpretable as an overall across-age NE. Age parameters are interpretable as age-specific elasticities: percentage changes in the NE at a particular age in response to a percent change in the overall NE. A similar approach can be used to confer interpretability on parameters of other mortality models.

Suggested Citation

  • de Jong, Piet & Tickle, Leonie & Xu, Jianhui, 2020. "A more meaningful parameterization of the Lee–Carter model," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 1-8.
    • Handle: RePEc:eee:insuma:v:94:y:2020:i:c:p:1-8
    DOI: 10.1016/j.insmatheco.2020.05.009
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    More about this item

    Keywords

    Mortality; Lee–Carter; Needed-exposure; Age–response; Age-specific elasticities;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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