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Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk

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  • Wolfram Horneff

    (Goethe University)

  • Raimond Maurer

    (Goethe University)

Abstract

In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.

Suggested Citation

  • Wolfram Horneff & Raimond Maurer, 2009. "Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk," Working Papers wp222, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp222
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    File URL: http://mrdrc.isr.umich.edu/publications/Papers/pdf/wp222.pdf
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    Cited by:

    1. Pirvu, Traian A. & Zhang, Huayue, 2012. "Optimal investment, consumption and life insurance under mean-reverting returns: The complete market solution," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 303-309.

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