Parametric mortality indexes: From index construction to hedging strategies
In this paper, we investigate the construction of mortality indexes using the time-varying parametersin 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 inde...
| Main Authors: | , , , |
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| Format: | Journal Article |
| Published: |
Elsevier BV
2014
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| Subjects: | |
| Online Access: | http://hdl.handle.net/20.500.11937/18922 |
| _version_ | 1848749885908582400 |
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| author | Tan, C.I. Li, Ka Ki Jackie Li, J.S. Balasooriya, U. |
| author_facet | Tan, C.I. Li, Ka Ki Jackie Li, J.S. Balasooriya, U. |
| author_sort | Tan, C.I. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | In this paper, we investigate the construction of mortality indexes using the time-varying parametersin 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. |
| first_indexed | 2025-11-14T07:28:03Z |
| format | Journal Article |
| id | curtin-20.500.11937-18922 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T07:28:03Z |
| publishDate | 2014 |
| publisher | Elsevier BV |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-189222017-09-13T15:58:57Z Parametric mortality indexes: From index construction to hedging strategies Tan, C.I. Li, Ka Ki Jackie Li, J.S. Balasooriya, U. Cairns–Blake–Dowd model Hedging strategies Longevity risk reduction Securitization Mortality indexes In this paper, we investigate the construction of mortality indexes using the time-varying parametersin 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 Journal Article http://hdl.handle.net/20.500.11937/18922 10.1016/j.insmatheco.2014.10.005 Elsevier BV restricted |
| spellingShingle | Cairns–Blake–Dowd model Hedging strategies Longevity risk reduction Securitization Mortality indexes Tan, C.I. Li, Ka Ki Jackie Li, J.S. Balasooriya, U. Parametric mortality indexes: From index construction to hedging strategies |
| title | Parametric mortality indexes: From index construction to hedging strategies |
| title_full | Parametric mortality indexes: From index construction to hedging strategies |
| title_fullStr | Parametric mortality indexes: From index construction to hedging strategies |
| title_full_unstemmed | Parametric mortality indexes: From index construction to hedging strategies |
| title_short | Parametric mortality indexes: From index construction to hedging strategies |
| title_sort | parametric mortality indexes: from index construction to hedging strategies |
| topic | Cairns–Blake–Dowd model Hedging strategies Longevity risk reduction Securitization Mortality indexes |
| url | http://hdl.handle.net/20.500.11937/18922 |