Single and cross-generation natural hedging of longevity and financial risk
AbstractThe paper provides natural hedging strategies among death benefits and annuities written on a single and on different generations. It obtains closed-form Delta and Gamma hedges, in the presence of both longevity and interest rate risk. We present an application to UK data on survivorship and bond dynamics. We first compare longevity and financial risk exposures: Deltas and Gammas for longevity risk are greater in absolute value than the corresponding sensitivities for interest rate risk. We then calculate the optimal hedges, both within and across generations. Our results apply to both asset and asset-liability management.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 257.
Length: 27 pages
Date of creation: 2012
Date of revision:
Longevity risk; Interest rate risk; Delta-Gamma hedging; Natural hedging; Cross-generation hedging.;
Other versions of this item:
- Elisa Luciano & Luca Regis & Elena Vigna, 2012. "Single and cross-generation natural hedging of longevity and financial risk," ICER Working Papers 04-2012, ICER - International Centre for Economic Research.
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- Elisa Luciano & Luca Regis & Elena Vigna, 2011. "Delta and Gamma hedging of mortality and interest rate risk," ICER Working Papers - Applied Mathematics Series 01-2011, ICER - International Centre for Economic Research.
- Luciano, Elisa & Regis, Luca & Vigna, Elena, 2012. "Delta–Gamma hedging of mortality and interest rate risk," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 402-412.
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- Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
- Elisa Luciano & Luca Regis, 2012. "Demographic risk transfer: is it worth for annuity providers?," ICER Working Papers 11-2012, ICER - International Centre for Economic Research.
- Elisa Luciano & Luca Regis, 2013.
"Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk,"
Carlo Alberto Notebooks
308, Collegio Carlo Alberto.
- Luciano, Elisa & Regis, Luca, 2014. "Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 68-77.
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