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The role of longevity bonds in optimal portfolios

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Author Info
Francesco Menoncin

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Abstract

A longevity bond pays coupons which are proportional to the survival rate of a given population. In such a way the longevity risk becomes hedgeable on the financial market. In our model there are: (i) a longevity bond as a derivative on the population survival rate, (ii) a bond as a derivative on the stochastic instantaneously riskless interest rate, and (iii) a stock. The investor maximizes the expected (CRRA) utility of his intertemporal consumption. In such a framework we demonstrate that the amount of wealth invested in the longevity bond reduces the portfolio weight of the bond without affecting neither the weight of the stock nor the weight of the riskless asset.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number 0601.

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Date of creation: 2006
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Handle: RePEc:ubs:wpaper:0601

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  2. 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. [Downloadable!] (restricted)
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  5. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 63-91, March. [Downloadable!]
  6. Menoncin, Francesco, 2002. "Optimal portfolio and background risk: an exact and an approximated solution," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 249-265, October. [Downloadable!] (restricted)
  7. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487. [Downloadable!] (restricted)
  8. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  9. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  10. Wachter, Jessica A., 2003. "Risk aversion and allocation to long-term bonds," Journal of Economic Theory, Elsevier, vol. 112(2), pages 325-333, October. [Downloadable!] (restricted)
  11. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 141-61. [Downloadable!] (restricted)
  12. George Chacko & Luis M. Viceira, 1999. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," NBER Working Papers 7377, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  2. Amedeo Fossati & Rosella Levaggi, 2008. "Delay is not the answer: waiting time in health care & income redistribution," Working Papers 0801, University of Brescia, Department of Economics. [Downloadable!]
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