Economic Pricing of Mortality-Linked Securities: A Tâtonnement Approach

Rui Zhou, Johnny Siu-Hang Li and Ken Seng Tan

Journal of Risk & Insurance, 2015, vol. 82, issue 1, 65-96

Abstract: type="main" xml:lang="en">

In previous research on pricing mortality-linked securities, the no-arbitrage approach is often used. However, this approach, which takes market prices as given, is difficult to implement in today's embryonic market where there are few traded securities. In this article, we tackle the pricing problem from a different angle by considering methods that are more related to fundamental economic concepts. Specifically, we treat the pricing work as aWalrasian tâtonnement process, in which prices are determined through a gradual calibration of supply and demand. We illustrate the proposed pricing framework with a hypothetical mortality-linked security and mortality data from the U.S. population.

Date: 2015
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