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Market Price of Longevity Risk for a Multi‐Cohort Mortality Model With Application to Longevity Bond Option Pricing

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  • Yajing Xu
  • Michael Sherris
  • Jonathan Ziveyi

Abstract

We introduce a multi‐cohort continuous time affine mortality model and, along with an affine arbitrage‐free term structure model, determine implied market prices of longevity risk in the BlackRock CoRI Retirement Indexes. These indexes provide a daily level of estimated cost of lifetime retirement income for 20 cohorts in the United States. Individuals can invest in BlackRock funds that track the indexes that are quoted on the NYSE. We use our model to derive closed‐form expressions for prices of European options on longevity zero‐coupon bonds and show the impact of stochastic mortality on long‐term longevity bond option prices.

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  • Yajing Xu & Michael Sherris & Jonathan Ziveyi, 2020. "Market Price of Longevity Risk for a Multi‐Cohort Mortality Model With Application to Longevity Bond Option Pricing," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 571-595, September.
    • Handle: RePEc:bla:jrinsu:v:87:y:2020:i:3:p:571-595
    DOI: 10.1111/jori.12273
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    References listed on IDEAS

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    Cited by:

    1. Li, Han & Liu, Haibo & Tang, Qihe & Yuan, Zhongyi, 2023. "Pricing extreme mortality risk in the wake of the COVID-19 pandemic," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 84-106.
    2. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.
    3. Zhiping Huang & Michael Sherris & Andrés M. Villegas & Jonathan Ziveyi, 2022. "Modelling USA Age-Cohort Mortality: A Comparison of Multi-Factor Affine Mortality Models," Risks, MDPI, vol. 10(9), pages 1-28, September.

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