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Parametric mortality indexes: From index construction to hedging strategies

Tan, Chong It; Li, Jackie; Li, Johnny Siu-Hang; Balasooriya, Uditha

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In this paper, we investigate the construction of mortality indexes using the time-varying parameters in common stochastic mortality models. We first study how existing models can be adapted to satisfy the new-data-invariant property, a property that is required to ensure the resulting mortality indexes are tractable by market participants. Among the collection of adapted models, we find that the adapted Model M7 (the Cairns–Blake–Dowd model with cohort and quadratic age effects) is the...[Show more]

dc.contributor.authorTan, Chong It
dc.contributor.authorLi, Jackie
dc.contributor.authorLi, Johnny Siu-Hang
dc.contributor.authorBalasooriya, Uditha
dc.date.accessioned2016-06-14T23:21:28Z
dc.identifier.issn0167-6687
dc.identifier.urihttp://hdl.handle.net/1885/103929
dc.description.abstractIn this paper, we investigate the construction of mortality indexes using the time-varying parameters in common stochastic mortality models. We first study how existing models can be adapted to satisfy the new-data-invariant property, a property that is required to ensure the resulting mortality indexes are tractable by market participants. Among the collection of adapted models, we find that the adapted Model M7 (the Cairns–Blake–Dowd model with cohort and quadratic age effects) is the most suitable model for constructing mortality indexes. One basis of this conclusion is that the adapted model M7 gives the best fitting and forecasting performance when applied to data over the age range of 40–90 for various populations. Another basis is that the three time-varying parameters in it are highly interpretable and rich in information content. Based on the three indexes created from this model, one can write a standardized mortality derivative called K-forward, which can be used to hedge longevity risk exposures. Another contribution of this paper is a method called key K-duration that permits one to calibrate a longevity hedge formed by K-forward contracts. Our numerical illustrations indicate that a K-forward hedge has a potential to outperform a q-forward hedge in terms of the number of hedging instruments required. © 2014 Elsevier B.V. All rights reserved.
dc.publisherElsevier
dc.sourceInsurance; Mathematics and Economics
dc.titleParametric mortality indexes: From index construction to hedging strategies
dc.typeJournal article
local.description.notesImported from ARIES
local.identifier.citationvolume59
dc.date.issued2014
local.identifier.absfor150204 - Insurance Studies
local.identifier.ariespublicationu5260803xPUB64
local.type.statusPublished Version
local.contributor.affiliationTan, Chong It, College of Business and Economics, ANU
local.contributor.affiliationLi, Jackie, Curtin University
local.contributor.affiliationLi, Johnny Siu-Hang, University of Waterloo
local.contributor.affiliationBalasooriya, Uditha, Nanyang Technological University
local.description.embargo2037-12-31
local.bibliographicCitation.issue2014
local.bibliographicCitation.startpage285
local.bibliographicCitation.lastpage299
local.identifier.doi10.1016/j.insmatheco.2014.10.005 0167-6687
dc.date.updated2016-06-14T09:13:03Z
CollectionsANU Research Publications

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