Evolution of coupled lives' dependency across generations and pricing impact
AbstractThis paper studies the dependence between coupled lives - both within and across generations - and its effects on prices of reversionary annuities in the presence of longevity risk. Longevity risk is represented via a stochastic mortality intensity. Dependence is modelled through copula functions. We consider Archimedean single and multi-parameter copulas. We find that dependence decreases when passing from older generations to younger generations. Not only the level of dependence but also its features - as measured by the copula - change across generations: the best-fit Archimedean copula is not the same across generations. Moreover, for all the generations under exam the single-parameter copula is dominated by the two-parameter one. The independence assumption produces quantifiable mispricing of reversionary annuities. The misspecification of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 258.
Length: 24 pages
Date of creation: 2012
Date of revision:
copula; goodness-of-fit; significance test; stochastic mortality; generation effect; reversionary annuity.;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-08 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Modelling stochastic mortality for dependent lives,"
Carlo Alberto Notebooks
43, Collegio Carlo Alberto.
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- Elisa Luciano & Elena Vigna, 2006.
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Carlo Alberto Notebooks
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- Elisa Luciano & Elena Vigna, 2005. "Non mean reverting affine processes for stochastic mortality," ICER Working Papers - Applied Mathematics Series 4-2005, ICER - International Centre for Economic Research.
- Ivan Kojadinovic & Jun Yan, . "Modeling Multivariate Distributions with Continuous Margins Using the copula R Package," Journal of Statistical Software, American Statistical Association, vol. 34(i09).
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