The age pattern of transitory mortality jumps and its impact on the pricing of catastrophic mortality bonds

Yanxin Liu and Johnny Siu-Hang Li

Insurance: Mathematics and Economics, 2015, vol. 64, issue C, 135-150

Abstract: To value catastrophic mortality bonds, a number of stochastic mortality models with transitory jump effects have been proposed. Rather than modeling the age pattern of jump effects explicitly, most of the existing models assume that the distributions of jump effects and general mortality improvements across ages are identical. Nevertheless, this assumption does not seem to be in line with what we observe from historical data. In this paper, we address this problem by introducing a Lee–Carter variant that captures the age pattern of mortality jumps by a distinct collection of parameters. The model variant is then further generalized to permit the age pattern of jump effects to vary randomly. We illustrate the two proposed models with mortality data from the United States and English and Welsh populations, and use them to value hypothetical mortality bonds with similar specifications to the Atlas IX Capital Class B note that was launched in 2013. It is found that the features we consider have a significant impact on the estimated prices.

Keywords: Risk-neutral valuation; Securitization; The Lee–Carter model; Jump effects; Catastrophic mortality bonds (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:64:y:2015:i:c:p:135-150

DOI: 10.1016/j.insmatheco.2015.05.005

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