Evolution of coupled lives' dependency across generations and pricing impact

Elisa Luciano, Jaap Spreeuw and Elena Vigna

No 258, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper studies the dependence between coupled lives - both within and across generations - and its effects on prices of reversionary annuities in the presence of longevity risk. Longevity risk is represented via a stochastic mortality intensity. Dependence is modelled through copula functions. We consider Archimedean single and multi-parameter copulas. We find that dependence decreases when passing from older generations to younger generations. Not only the level of dependence but also its features - as measured by the copula - change across generations: the best-fit Archimedean copula is not the same across generations. Moreover, for all the generations under exam the single-parameter copula is dominated by the two-parameter one. The independence assumption produces quantifiable mispricing of reversionary annuities. The misspecification of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.

Keywords: copula; goodness-of-fit; significance test; stochastic mortality; generation effect; reversionary annuity. (search for similar items in EconPapers)
JEL-codes: C12 C18 G22 J12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:258

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