Pricing longevity-linked derivatives using a stochastic mortality model

Yige Wang, Nan Zhang, Zhuo Jin and Tin Long Ho

Communications in Statistics - Theory and Methods, 2019, vol. 48, issue 24, 5923-5942

Abstract: We propose a 2-factor MBMM model with exponential Lévy process to develop a stochastic mortality process. The two components are fitted by two independent NIG distributions. Compared to Lee–Carter model or 1-factor MBMM model, our mortality model explains more variation and improves the goodness of fit by including the second time component. Based on the improved model, we price three longevity-linked financial instruments, namely the longevity bond, q-forward and s-forward. The pricing is demonstrated on English and Welsh males aged 65 in 2013. Results indicate that the 2-factor MBMM model gives the highest price for mortality-related type of contract.

Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/03610926.2018.1563171

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