Longevity bond pricing under the threshold CIR model

Fangyuan Dong and Hoi Ying Wong

Finance Research Letters, 2015, vol. 15, issue C, 195-207

Abstract: While mean reversion is a well-documented feature in interest rate and commodity prices, empirical studies show that the long-term mean level and the mean reversion rate are not persistent in time. This paper introduces a threshold Cox–Ingersol–Ross (TCIR) model in which a regime shift is determined endogenously by the underlying financial asset. We derive the joint moment-generating function (MGF) of the terminal TCIR value and an average of it. The MGF enables us to value risk-free bonds and Longevity bonds analytically.

Keywords: Mean reversion; Threshold CIR model; Longevity bonds; Longevity models; Interest rate (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:15:y:2015:i:c:p:195-207

DOI: 10.1016/j.frl.2015.09.010

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