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

Charles Sutcliffe

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: 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

Keywords: Annuities; annuity puzzle; arbitrage; longevity; speculation; portfolios; life insurance (search for similar items in EconPapers)
JEL-codes: G12 G22 G23 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-07
New Economics Papers: this item is included in nep-hea and nep-ias
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Related works:
Journal Article: Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2013-06

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