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Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios

Listed author(s):
  • Charles Sutcliffe

    ()

    (ICMA Centre, Henley Business School, University of Reading)

Annuities are perceived as being illiquid financial instruments, and this has limited their attractiveness to consumers and inclusion in financial models. However, short positions in annuities can be replicated using life insurance and debt, permitting long positions in annuities to be offset, or short annuity positions to be created. The implications of this result for the annuity puzzle, arbitrage between the annuity and life insurance markets, and speculation on expected longevity are investigated. It is argued that annuity replication could help solve the annuity puzzle, improve the price efficiency of annuity markets and promote the inclusion of annuities in household portfolios

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Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2013-06.

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Length: 31 pages
Date of creation: Jul 2013
Handle: RePEc:rdg:icmadp:icma-dp2013-06
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