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Stochastic Life Annuities

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  • Daniel Dufresne

Abstract

This paper gives analytic approximations for the distribution of a stochastic life annuity. It is assumed that returns follow a geometric Brownian motion. The distribution of the stochastic annuity may be used to answer questions such as “What is the probability that an amount F is sufficient to fund a pension with annual amount y to a pensioner aged x?” The main idea is to approximate the future lifetime distribution with a combination of exponentials, and then apply a known formula (due to Marc Yor) related to the integral of geometric Brownian motion. The approximations are very accurate in the cases studied.

Suggested Citation

  • Daniel Dufresne, 2007. "Stochastic Life Annuities," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(1), pages 136-157.
    • Handle: RePEc:taf:uaajxx:v:11:y:2007:i:1:p:136-157
    DOI: 10.1080/10920277.2007.10597441
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    Cited by:

    1. Ng, Andrew C.Y., 2009. "On a dual model with a dividend threshold," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 315-324, April.
    2. Pirjol, Dan & Zhu, Lingjiong, 2016. "Discrete sums of geometric Brownian motions, annuities and Asian options," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 19-37.
    3. Liang, Xiaoqing & Tsai, Cary Chi-Liang & Lu, Yi, 2016. "Valuing guaranteed equity-linked contracts under piecewise constant forces of mortality," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 150-161.
    4. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2015. "Geometric stopping of a random walk and its applications to valuing equity-linked death benefits," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 313-325.
    5. Xing-Fang Huang & Ting Zhang & Yang Yang & Tao Jiang, 2017. "Ruin Probabilities in a Dependent Discrete-Time Risk Model With Gamma-Like Tailed Insurance Risks," Risks, MDPI, vol. 5(1), pages 1-14, March.
    6. Zhou, Jiang & Wu, Lan, 2015. "The time of deducting fees for variable annuities under the state-dependent fee structure," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 125-134.
    7. Wenguang Yu & Yaodi Yong & Guofeng Guan & Yujuan Huang & Wen Su & Chaoran Cui, 2019. "Valuing Guaranteed Minimum Death Benefits by Cosine Series Expansion," Mathematics, MDPI, vol. 7(9), pages 1-15, September.
    8. Shang, Zhaoning & Goovaerts, Marc & Dhaene, Jan, 2011. "A recursive approach to mortality-linked derivative pricing," Insurance: Mathematics and Economics, Elsevier, vol. 49(2), pages 240-248, September.
    9. Yaodi Yong & Hailiang Yang, 2021. "Valuation of Cliquet-Style Guarantees with Death Benefits in Jump Diffusion Models," Mathematics, MDPI, vol. 9(16), pages 1-21, August.
    10. Liu, Xiaoming & Jang, Jisoo & Mee Kim, Sun, 2011. "An application of comonotonicity theory in a stochastic life annuity framework," Insurance: Mathematics and Economics, Elsevier, vol. 48(2), pages 271-279, March.
    11. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2013. "Valuing equity-linked death benefits in jump diffusion models," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 615-623.
    12. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2012. "Valuing equity-linked death benefits and other contingent options: A discounted density approach," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 73-92.

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