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Modelling Mortality Using Multiple Stochastic Latent Factors

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  • Jorge Bravo

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    (University of Évora, Department of Economics and CEFAGEUE)

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    Abstract

    In this paper we develop a new model for stochastic mortality that considers the possibility of both positive and negative catastrophic mortality shocks. Specifically, we assume that the mortality intensity can be described by an affine function of a finite number of latent factors whose dynamics is represented by affine-jump diffusion processes. The model is then embedded into an affine-jump framework, widely used in the term structure literature, in order to derive closed-form solutions for the survival probability. This framework and model application to the classical Gompertz-Makeham mortality law provides a theoretical foundation for the pricing and hedging of longevity-linked derivatives.

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    File URL: http://www.cefage.uevora.pt/en/content/download/2894/38590/version/1/file/2011_26.pdf
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    Bibliographic Info

    Paper provided by University of Evora, CEFAGE-UE (Portugal) in its series CEFAGE-UE Working Papers with number 2011_26.

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    Length: 16 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:cfe:wpcefa:2011_26

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    Related research

    Keywords: Stochastic mortality intensity; Longevity risk; Affine-jump models.;

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    1. Shripad Tuljapurkar & Carl Boe, . "Mortality Change and Forecasting: How Much and How Little Do We Know?," Pension Research Council Working Papers 98-2, Wharton School Pension Research Council, University of Pennsylvania.
    2. Booth, Heather, 2006. "Demographic forecasting: 1980 to 2005 in review," International Journal of Forecasting, Elsevier, vol. 22(3), pages 547-581.
    3. Dahl, Mikkel, 2004. "Stochastic mortality in life insurance: market reserves and mortality-linked insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 35(1), pages 113-136, August.
    4. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December.
    5. Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
    6. Philippe Artzner & Freddy Delbaen, 1995. "Default Risk Insurance And Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 187-195.
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