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Hedging The Longevity Risk For The Portuguese Population In The Bond Market

Author

Listed:
  • Rúben Pereira Carlos

    (Mercer Portugal)

  • Onofre Simões

    (ISEG - Instituto Superior de Economia e Gestão)

Abstract

Increases in life expectancy have been noticeable in recent decades and this is one of the key issues to the annuities industry and to the public pensions system. To address the problem of hedging the longevity risk, several instruments have been discussed within the financial markets in order to find a solution. Many stochastic models have been suggested to fit the evolution of the mortality curve as close as possible, so that these financial instruments can be issued on a solid basis. In this paper, we discuss and simulate the issue of two longevity bonds with cash flows linked to the evolution of a survival index, built on the Portuguese mortality data. The forecast of mortality rates is per-formed using a two-factor stochastic model, the Cairns-Blake-Dowd (CBD) model. The main objective is to develop a hedging solution to the increases in human longevity in Portugal. Classification- JEL:

Suggested Citation

  • Rúben Pereira Carlos & Onofre Simões, 2012. "Hedging The Longevity Risk For The Portuguese Population In The Bond Market," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 63-82.
    • Handle: RePEc:pjm:journl:v:xvii:y:2012:i:1:p:63-82
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    References listed on IDEAS

    as
    1. Willets, R. C., 2004. "The Cohort Effect: Insights and Explanations," British Actuarial Journal, Cambridge University Press, vol. 10(4), pages 833-877, October.
    2. Heather Booth & Rob Hyndman & Leonie Tickle & Piet de Jong, 2006. "Lee-Carter mortality forecasting: a multi-country comparison of variants and extensions," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 15(9), pages 289-310.
    3. 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, December.
    4. Dowd, Kevin & Cairns, Andrew J.G. & Blake, David & Coughlan, Guy D. & Epstein, David & Khalaf-Allah, Marwa, 2010. "Evaluating the goodness of fit of stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 255-265, December.
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