Pricing longevity risk with the parametric bootstrap: A maximum entropy approach
In recent years, there has been significant development in the securitization of longevity risk. Various methods for pricing longevity risk have been proposed. In this paper we present an alternative pricing method, which is based on the maximization of the Shannon entropy in physics. Specifically, we propose implementing this pricing method with the parametric bootstrap (Brouhns et al., 2005), which is highly flexible and can be performed under different model assumptions. Through this pricing method we also quantify the impact of cohort effects and parameter uncertainty on prices of mortality-linked securities. Numerical illustrations based on longevity bonds with different maturities are provided.
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.:
- Wang, Shaun S., 2002. "A Universal Framework for Pricing Financial and Insurance Risks," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 32(02), pages 213-234, November.
- F. Douglas Foster & Charles H. Whiteman, 1999. "An Application of Bayesian Option Pricing to the Soybean Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 722-727.
- Czado, Claudia & Delwarde, Antoine & Denuit, Michel, 2005. "Bayesian Poisson log-bilinear mortality projections," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 260-284, June.
- Haberman, Steven & Renshaw, Arthur, 2009. "On age-period-cohort parametric mortality rate projections," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 255-270, October.
- Richards, S. J. & Kirkby, J. G. & Currie, I. D., 2006. "The Importance of Year of Birth in Two-Dimensional Mortality Data," British Actuarial Journal, Cambridge University Press, vol. 12(01), pages 5-38, March.
- Kevin Dowd & David Blake & Andrew J. G. Cairns & Paul Dawson, 2006. "Survivor Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 1-17.
- Hua Chen & Samuel H. Cox, 2009. "Modeling Mortality With Jumps: Applications to Mortality Securitization," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 727-751.
- Willets, R. C., 2004. "The Cohort Effect: Insights and Explanations," British Actuarial Journal, Cambridge University Press, vol. 10(04), pages 833-877, October.
- Wang, Shaun, 1996. "Premium Calculation by Transforming the Layer Premium Density," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 26(01), pages 71-92, May.
- Kogure, Atsuyuki & Kurachi, Yoshiyuki, 2010. "A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 162-172, February.
- Marco Frittelli, 2000. "The Minimal Entropy Martingale Measure and the Valuation Problem in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 39-52.
- Stutzer, Michael, 1996. " A Simple Nonparametric Approach to Derivative Security Valuation," Journal of Finance, American Finance Association, vol. 51(5), pages 1633-1652, December.
- Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
- Carter, Lawrence R. & Lee, Ronald D., 1992. "Modeling and forecasting US sex differentials in mortality," International Journal of Forecasting, Elsevier, vol. 8(3), pages 393-411, November.
- Yijia Lin & Samuel H. Cox, 2005. "Securitization of Mortality Risks in Life Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 227-252.
- Brouhns, Natacha & Denuit, Michel & Vermunt, Jeroen K., 2002. "A Poisson log-bilinear regression approach to the construction of projected lifetables," Insurance: Mathematics and Economics, Elsevier, vol. 31(3), pages 373-393, December.
- Lin, Yijia & Cox, Samuel H., 2008. "Securitization of catastrophe mortality risks," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 628-637, April.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:47:y:2010:i:2:p:176-186. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.