Time-consistent longevity hedging with long-range dependence

Ling Wang and Hoi Ying Wong

Insurance: Mathematics and Economics, 2021, vol. 99, issue C, 25-41

Abstract: Longevity securitization enables insurers to manage longevity or mortality risk in the life market. Recent empirical studies identify long-range dependence (LRD) in mortality rates using life tables, which casts doubt on the adequacy of Markovian models for actuarial pricing and risk management. This paper derives the first time-consistent mean–variance longevity hedging strategy for insurers using a stochastic mortality model with LRD. We adopt the open-loop equilibrium control framework and derive an analytical solution to the hedging strategy. Our numerical examples show the relevance of LRD to longevity hedging and the cost of ignoring it.

Keywords: Mean–variance hedging; Time-consistency; Open-loop equilibrium control; Long-range dependence; Mortality model (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:99:y:2021:i:c:p:25-41

DOI: 10.1016/j.insmatheco.2021.03.004

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