Consistent Dynamic Affine Mortality Model for Longevity Risk Applications

Craig Blackburn () and Michael Sherris ()
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Craig Blackburn: School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales
Michael Sherris: School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales

No 201107, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: This paper proposes and assesses consistent multi-factor dynamic affine mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves. The framework includes an arbitrage-free model specification. There are multiple risk factors allowing applications to hedging and pricing mortality and longevity bonds, mortality derivatives and more general risk management problems. A state-space representation is used to estimate parameters for the model with the Kalman filter. A 3-factor model specification is shown to provide a good fit to the observed survival curves especially for older ages, and performs better than the 2-factor models. Consistent models are shown to improve model performance and stability.

Keywords: Mortality model; longevity risk; multi-factor; affine; arbitrage-free; consistent; Kalman filter; Swedish mortality (search for similar items in EconPapers)
JEL-codes: C13 C51 C52 G12 G22 G23 J11 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011-05
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