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A Three-Factor Model for Mortality Modeling

Author

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  • Vincenzo Russo
  • Rosella Giacometti
  • Svetlozar Rachev
  • Frank J. Fabozzi

Abstract

In this article, we propose a three-factor model for mortality modeling in which the dynamic of the entire term structure of mortality rates can be expressed in closed form as a function of three variables x, t, and y. Due to this feature, we are able to project mortality rates across age (x), across time (t), and for y years (y ⩾ 1) after t. Our proposal differs from most existing models where only the one-year mortality rate is considered (y = 1). The model is characterized by three parameters that are calibrated yearly. We describe the stochastic dynamic of the three factors with correlated autoregressive processes. We generate stochastic scenarios accounting for the historical mortality trend in a consistent manner with the Gompertz law. Using population mortality data for Italy, the U.S., and the U.K., the model’s forecasting capability is assessed, and a comparative analysis with other models is provided.

Suggested Citation

  • Vincenzo Russo & Rosella Giacometti & Svetlozar Rachev & Frank J. Fabozzi, 2015. "A Three-Factor Model for Mortality Modeling," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(2), pages 129-141, April.
    • Handle: RePEc:taf:uaajxx:v:19:y:2015:i:2:p:129-141
    DOI: 10.1080/10920277.2015.1015262
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    Cited by:

    1. Zhe Huang & Franck Martin, 2017. "Optimal pairs trading strategies in a cointegration framework," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2017-08, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.

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