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A Multivariate Model of Strategic Asset Allocation with Longevity Risk

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  • Favero, Carlo A.
  • Bisetti, Emilio
  • Nocera, Giacomo
  • Tebaldi, Claudio

Abstract

Generalized unexpected raise in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the Campbell and Viceira (2005) strategic asset allocation model including a longevity-linked investment possibility in addition to equity and fixed income securities. Estimation of the model, based on prices for standardized annuities publicly offered by US insurance companies, shows that aggregate shocks to survival probabilities are predictors for long term returns of the longevity linked securities, and reveals an unexpected predictability pattern. The empirical valuation of the market price of longevity risk confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.

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  • Favero, Carlo A. & Bisetti, Emilio & Nocera, Giacomo & Tebaldi, Claudio, 2015. "A Multivariate Model of Strategic Asset Allocation with Longevity Risk," CEPR Discussion Papers 10595, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10595
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    Cited by:

    1. Yajing Xu & Michael Sherris & Jonathan Ziveyi, 2020. "Market Price of Longevity Risk for a Multi‐Cohort Mortality Model With Application to Longevity Bond Option Pricing," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 571-595, September.
    2. Amariei, Cosmina, 2020. "Asset Allocation in Europe: Reality vs. Expectations," ECMI Papers 27304, Centre for European Policy Studies.
    3. Carlo A. Favero & Ruben Fernandez-Fuertes, 2023. "Monetary Policy in the COVID Era and Beyond: the Fed vs the ECB," BAFFI CAREFIN Working Papers 23209, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Chen, Zhanhui & Yang, Bowen, 2019. "In search of preference shock risks: Evidence from longevity risks and momentum profits," Journal of Financial Economics, Elsevier, vol. 133(1), pages 225-249.
    5. Rachel WINGENBACH & Jong-Min KIM & Hojin JUNG, 2020. "Living Longer in High Longevity Risk," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 86(1), pages 47-86, March.

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    More about this item

    Keywords

    Longevity risk; Strategic asset allocation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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