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Inference pitfalls in Lee–Carter model for forecasting mortality

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  • Leng, Xuan
  • Peng, Liang

Abstract

Forecasting mortality is of importance in managing longevity risks for insurance companies and pension funds. Some widely employed models are the so-called Lee–Carter model and its extensions, which involve a two-step estimation procedure. Empirical findings from using the Lee–Carter model and its extensions prefer an ARIMA(p,1,q) model for modeling the dynamics of the logarithms of mortality rates, which is called mortality index and is a key element in forecasting mortality rates and managing longevity risks. In this paper we prove that the proposed two-step estimation procedure in Lee and Carter (1992) cannot detect the true dynamics of the mortality index in general, which means that future mortality projections based on the two step inference procedure for Lee–Carter model and its extensions are questionable.

Suggested Citation

  • Leng, Xuan & Peng, Liang, 2016. "Inference pitfalls in Lee–Carter model for forecasting mortality," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 58-65.
  • Handle: RePEc:eee:insuma:v:70:y:2016:i:c:p:58-65
    DOI: 10.1016/j.insmatheco.2016.05.016
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    References listed on IDEAS

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    1. Nan Li & Ronald Lee, 2005. "Coherent mortality forecasts for a group of populations: An extension of the lee-carter method," Demography, Springer;Population Association of America (PAA), vol. 42(3), pages 575-594, August.
    2. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin & Coughlan, Guy D. & Epstein, David & Khalaf-Allah, Marwa, 2011. "Mortality density forecasts: An analysis of six stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 48(3), pages 355-367, May.
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    5. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    6. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    7. Li, Johnny Siu-Hang, 2010. "Pricing longevity risk with the parametric bootstrap: A maximum entropy approach," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 176-186, October.
    8. Yang, Sharon S. & Wang, Chou-Wen, 2013. "Pricing and securitization of multi-country longevity risk with mortality dependence," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 157-169.
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    Cited by:

    1. repec:eee:insuma:v:75:y:2017:i:c:p:117-125 is not listed on IDEAS
    2. Man Chung Fung & Gareth W. Peters & Pavel V. Shevchenko, 2017. "Cohort effects in mortality modelling: a Bayesian state-space approach," Papers 1703.08282, arXiv.org.

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