A Multivariate Model of Strategic Asset Allocation with Longevity Risk
This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of (Campbell Viceira 2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates and gives an empirical valuation of the market price of longevity risk based on the LeeCarter(1992) mortality model and on the time series of prices for standardized annuities publicly offered by US insurance companies. Keywords: Longevity Risk, Strategic Asset Allocation JEL Classification: [G11, G12, G22]
|Date of creation:||2013|
|Contact details of provider:|| Postal: via Rontgen, 1 - 20136 Milano (Italy)|
Web page: http://www.igier.unibocconi.it/
|Order Information:|| Web: http://www.igier.unibocconi.it/en/papers/index.htm Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
- John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
- John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
- Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
- Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, "undated". "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers 97-9, Wharton School Pension Research Council, University of Pennsylvania.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
- Biffis, Enrico & Blake, David, 2010. "Securitizing and tranching longevity exposures," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 186-197, February.
- Campbell, John Y. & Lo, Andrew W. & MacKinlay, A. Craig & Whitelaw, Robert F., 1998. "The Econometrics Of Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(04), pages 559-562, December.
- Erhan Bayraktar & Virginia Young, 2008. "Pricing options in incomplete equity markets via the instantaneous Sharpe ratio," Annals of Finance, Springer, vol. 4(4), pages 399-429, October.
- Erhan Bayraktar & Virginia R. Young, 2007. "Pricing Options in Incomplete Equity Markets via the Instantaneous Sharpe Ratio," Papers math/0701650, arXiv.org, revised Jul 2007.
- Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
- Bayraktar, Erhan & Milevsky, Moshe A. & David Promislow, S. & Young, Virginia R., 2009. "Valuation of mortality risk via the instantaneous Sharpe ratio: Applications to life annuities," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 676-691, March.
- Erhan Bayraktar & Moshe Milevsky & David Promislow & Virginia Young, 2008. "Valuation of Mortality Risk via the Instantaneous Sharpe Ratio: Applications to Life Annuities," Papers 0802.3250, arXiv.org.
- Pitacco, Ermanno & Denuit, Michel & Haberman, Steven & Olivieri, Annamaria, 2009. "Modelling Longevity Dynamics for Pensions and Annuity Business," OUP Catalogue, Oxford University Press, number 9780199547272, April. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:igi:igierp:503. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.