Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk

Wolfram Horneff and Raimond Maurer
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Wolfram Horneff: Goethe University
Raimond Maurer: Goethe University

Working Papers from University of Michigan, Michigan Retirement Research Center

Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.

Pages: 32 pages
Date: 2009-09
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