THE PRICING OF MORTALITY-LINKED CONTINGENT CLAIMS: AN EQUILIBRIUM APPROACH

Jeffrey T. Tsai and Larry Y. Tzeng

ASTIN Bulletin, 2013, vol. 43, issue 2, 97-121

Abstract: This study introduces an equilibrium approach to price mortality-linked securities in a discrete time economy, assuming that the mortality rate has a transformed normal distribution. This pricing method complements current studies on the valuation of mortality-linked securities, which only have discrete trading opportunities and insufficient market trading data. Like the Wang transform, the valuation relationship is still risk-neutral (preference-free) and the mortality-linked security is priced as the expected value of its terminal payoff, discounted by the risk-free rate. This study provides an example of pricing the Swiss Re mortality bond issued in 2003 and obtains an approximated closed-form solution.

Date: 2013
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