Statistical emulators for pricing and hedging longevity risk products

J. Risk and M. Ludkovski

Insurance: Mathematics and Economics, 2016, vol. 68, issue C, 45-60

Abstract: We propose the use of statistical emulators for the purpose of analyzing mortality-linked contracts in stochastic mortality models. Such models typically require (nested) evaluation of expected values of nonlinear functionals of multi-dimensional stochastic processes. Except in the simplest cases, no closed-form expressions are available, necessitating numerical approximation. To complement various analytic approximations, we advocate the use of modern statistical tools from machine learning to generate a flexible, non-parametric surrogate for the true mappings. This method allows performance guarantees regarding approximation accuracy and removes the need for nested simulation. We illustrate our approach with case studies involving (i) a Lee–Carter model with mortality shocks; (ii) index-based static hedging with longevity basis risk; (iii) a Cairns–Blake–Dowd stochastic survival probability model; (iv) variable annuities under stochastic interest rate and mortality.

Keywords: Statistical emulation; Longevity risk; Life annuities; Valuation of mortality-contingent claims; Kriging; Gaussian processes (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:68:y:2016:i:c:p:45-60

DOI: 10.1016/j.insmatheco.2016.02.006

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