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Pricing longevity-linked derivatives using a stochastic mortality model

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  • Yige Wang
  • Nan Zhang
  • Zhuo Jin
  • Tin Long Ho

Abstract

We propose a 2-factor MBMM model with exponential Lévy process to develop a stochastic mortality process. The two components are fitted by two independent NIG distributions. Compared to Lee–Carter model or 1-factor MBMM model, our mortality model explains more variation and improves the goodness of fit by including the second time component. Based on the improved model, we price three longevity-linked financial instruments, namely the longevity bond, q-forward and s-forward. The pricing is demonstrated on English and Welsh males aged 65 in 2013. Results indicate that the 2-factor MBMM model gives the highest price for mortality-related type of contract.

Suggested Citation

  • Yige Wang & Nan Zhang & Zhuo Jin & Tin Long Ho, 2019. "Pricing longevity-linked derivatives using a stochastic mortality model," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 48(24), pages 5923-5942, December.
    • Handle: RePEc:taf:lstaxx:v:48:y:2019:i:24:p:5923-5942
    DOI: 10.1080/03610926.2018.1563171
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    Cited by:

    1. Wang, Ling & Chiu, Mei Choi & Wong, Hoi Ying, 2021. "Volterra mortality model: Actuarial valuation and risk management with long-range dependence," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 1-14.
    2. Ling Wang & Mei Choi Chiu & Hoi Ying Wong, 2020. "Volterra mortality model: Actuarial valuation and risk management with long-range dependence," Papers 2009.09572, arXiv.org.

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