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Deterministic and stochastic trends in the Lee-Carter mortality model

Laurent Callot (), Niels Haldrup () and Malene Kallestrup Lamb ()
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Malene Kallestrup Lamb: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The Lee and Carter (1992) model assumes that the deterministic and stochastic time series dynamics loads with identical weights when describing the development of age specific mortality rates. Effectively this means that the main characteristics of the model simplifies to a random walk model with age specific drift components. But restricting the adjustment mechanism of the stochastic and linear trend components to be identical may be a too strong simplification. In fact, the presence of a stochastic trend component may itself result from a bias induced by properly fitting the linear trend that characterizes mortality data. We find empirical evidence that this feature of the Lee-Carter model overly restricts the system dynamics and we suggest to separate the deterministic and stochastic time series components at the benefit of improved fit and forecasting performance. In fact, we find that the classical Lee-Carter model will otherwise over estimate the reduction of mortality for the younger age groups and will under estimate the reduction of mortality for the older age groups. In practice, our recommendation means that the Lee-Carter model instead of a one-factor model should be formulated as a two (or several)-factor model where one factor is deterministic and the other factors are stochastic. This feature generalizes to the range of models that extend the Lee-Carter model in various directions.

Keywords: Mortality modelling; factor models; principal components; stochastic and deterministic trends (search for similar items in EconPapers)
JEL-codes: C2 C23 J1 J11 (search for similar items in EconPapers)
Pages: 12
Date: 2014-11-19
New Economics Papers: this item is included in nep-age, nep-ecm, nep-for and nep-ore
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Journal Article: Deterministic and stochastic trends in the Lee–Carter mortality model (2016) Downloads
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