A recursive approach to mortality-linked derivative pricing

Zhaoning Shang, Marc Goovaerts and Jan Dhaene

Insurance: Mathematics and Economics, 2011, vol. 49, issue 2, 240-248

Abstract: In this paper, we develop a recursive method to derive an exact numerical and nearly analytical representation of the Laplace transform of the transition density function with respect to the time variable for time-homogeneous diffusion processes. We further apply this recursion algorithm to the pricing of mortality-linked derivatives. Given an arbitrary stochastic future lifetime , the probability distribution function of the present value of a cash flow depending on can be approximated by a mixture of exponentials, based on Jacobi polynomial expansions. In case of mortality-linked derivative pricing, the required Laplace inversion can be avoided by introducing this mixture of exponentials as an approximation of the distribution of the survival time in the recursion scheme. This approximation significantly improves the efficiency of the algorithm.

Keywords: Mortality-linked; derivative; Diffusion; process; Transition; density; function; Feynman-Kac; integral (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:49:y:2011:i:2:p:240-248

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