A step-by-step guide to building two-population stochastic mortality models

Johnny Siu-Hang Li, Rui Zhou and Mary Hardy

Insurance: Mathematics and Economics, 2015, vol. 63, issue C, 121-134

Abstract: Two-population stochastic mortality models play a crucial role in the securitization of longevity risk. In particular, they allow us to quantify the population basis risk when longevity hedges are built from broad-based mortality indexes. In this paper, we propose and illustrate a systematic process for constructing a two-population mortality model for a pair of populations. The process encompasses four steps, namely (1) determining the conditions for biological reasonableness, (2) identifying an appropriate base model specification, (3) choosing a suitable time-series process and correlation structure for projecting period and/or cohort effects into the future, and (4) model evaluation.

Keywords: Index-based longevity hedges; Population basis risk; Coherent mortality forecasting; Selection of mortality models; Evaluation of mortality models (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:63:y:2015:i:c:p:121-134

DOI: 10.1016/j.insmatheco.2015.03.021

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