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Consistent Dynamic Affine Mortality Model for Longevity Risk Applications

  • Craig Blackburn

    ()

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Michael Sherris

    ()

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

Registered author(s):

    This paper proposes and assesses consistent multi-factor dynamic affine mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves. The framework includes an arbitrage-free model specification. There are multiple risk factors allowing applications to hedging and pricing mortality and longevity bonds, mortality derivatives and more general risk management problems. A state-space representation is used to estimate parameters for the model with the Kalman filter. A 3-factor model specification is shown to provide a good fit to the observed survival curves especially for older ages, and performs better than the 2-factor models. Consistent models are shown to improve model performance and stability.

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    File URL: http://cepar.edu.au/media/48733/Longevity%20Risk%20Applications.pdf
    File Function: First version, 2011
    Download Restriction: no

    Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201107.

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    Length: 33 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:asb:wpaper:201107
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    1. Elisa Luciano & Elena Vigna, 2006. "Non mean reverting affne processes for stochastic mortality," Carlo Alberto Notebooks 30, Collegio Carlo Alberto.
    2. Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March.
    3. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2008. "An Arbitrage-Free Generalized Nelson-Siegel Term Structure Model," PIER Working Paper Archive 08-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    4. Tomas Björk & Bent Jesper Christensen, 1999. "Interest Rate Dynamics and Consistent Forward Rate Curves," Mathematical Finance, Wiley Blackwell, vol. 9(4), pages 323-348.
    5. De Rossi, Giuliano, 2004. "Kalman filtering of consistent forward rate curves: a tool to estimate and model dynamically the term structure," Journal of Empirical Finance, Elsevier, vol. 11(2), pages 277-308, March.
    6. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
    7. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
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