Pricing extreme mortality risk in the wake of the COVID-19 pandemic

Han Li, Haibo Liu, Qihe Tang and Zhongyi Yuan

Insurance: Mathematics and Economics, 2023, vol. 108, issue C, 84-106

Abstract: In pricing extreme mortality risk, it is commonly assumed that interest rate and mortality rate are independent. However, the COVID-19 pandemic calls this assumption into question. In this paper, we employ a bivariate affine jump-diffusion model to describe the joint dynamics of interest rate and excess mortality, allowing for both correlated diffusions and joint jumps. Utilizing the latest U.S. mortality and interest rate data, we find a significant negative correlation between interest rate and excess mortality, and a much higher jump intensity when the pandemic experience is considered. Moreover, we construct a risk-neutral pricing measure that accounts for both diffusion and jump risk premia, and we solve for the market prices of risk based on mortality bond prices. Our results show that the pandemic experience can drastically change investors' perception of the mortality risk market in the post-pandemic era.

Keywords: Affine jump-diffusion model; COVID-19; Implied market price of risk; Instantaneous correlation; Mortality-linked security; Pricing (search for similar items in EconPapers)
JEL-codes: C32 C58 G13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:108:y:2023:i:c:p:84-106

DOI: 10.1016/j.insmatheco.2022.11.002

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