Optimal income drawdown and investment with longevity basis risk

Ankush Agarwal, Christian-Oliver Ewald and Yongjie Wang

Scandinavian Actuarial Journal, 2025, vol. 2025, issue 7, 680-717

Abstract: We investigate a utility maximisation problem for a pension scheme which offers an income drawdown policy. Apart from market risk, we specifically focus on longevity basis risk which arises when the forces of mortality of the scheme's target population and the reference population of a longevity bond used for hedging, are not perfectly correlated. By modelling the forces of mortality of the reference and target populations as stochastic affine processes, we derive analytic solutions for the relevant investment strategy and benefit withdrawal rate. Our model also accounts for dependencies between mortality rate fluctuations and stock prices. Our extensive numerical results demonstrate that the longevity bond acts as an effective hedging instrument, even in the presence of longevity basis risk.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/03461238.2025.2455056 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:sactxx:v:2025:y:2025:i:7:p:680-717

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/sact20

DOI: 10.1080/03461238.2025.2455056

Access Statistics for this article

Scandinavian Actuarial Journal is currently edited by Boualem Djehiche

More articles in Scandinavian Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().