Multidimensional Lee–Carter model with switching mortality processes
This paper proposes a multidimensional Lee–Carter model, in which the time dependent components are ruled by switching regime processes. The main feature of this model is its ability to replicate the changes of regimes observed in the mortality evolution. Changes of measure, preserving the dynamics of the mortality process under a pricing measure, are also studied. After a review of the calibration method, a 2D, 2-regimes model is fitted to the male and female French population, for the period 1946–2007. Our analysis reveals that one regime corresponds to longevity conditions observed during the decade following the second world war, while the second regime is related to longevity improvements observed during the last 30 years. To conclude, we analyze, in a numerical application, the influence of changes of measure affecting transition probabilities, on prices of life and death insurances.
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Volume (Year): 50 (2012)
Issue (Month): 2 ()
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- Bauer, Daniel & Bergmann, Daniela & Kiesel, Rüdiger, 2010. "On the Risk-Neutral Valuation of Life Insurance Contracts with Numerical Methods in View," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 40(01), pages 65-95, May.
- Cairns, Andrew J.G. & Blake, David & Dowd, Kevin, 2006. "Pricing Death: Frameworks for the Valuation and Securitization of Mortality Risk," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 36(01), pages 79-120, May.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Bauer, Daniel & Börger, Matthias & Ruß, Jochen, 2010. "On the pricing of longevity-linked securities," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 139-149, February.
- Pitacco, Ermanno, 2004. "Survival models in a dynamic context: a survey," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 279-298, October.
- Renshaw, A. E. & Haberman, S., 2003. "Lee-Carter mortality forecasting with age-specific enhancement," Insurance: Mathematics and Economics, Elsevier, vol. 33(2), pages 255-272, October.
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