Evolution of Coupled Lives' Dependency Across Generations and Pricing Impact
University of Turin - Department of Statistics and Applied Mathematics; International Centre for Economic Research (ICER); Collegio Carlo Alberto
City University London - Sir John Cass Business School
University of Turin - Faculty of Economics; Collegio Carlo Alberto; CeRP
May 25, 2012
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 modeled through copula functions. We consider Archimedean single and multi-parameter copulas. We fi nd 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-fi t 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 quantifi able mispricing of reversionary annuities. The misspeci cation of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.
Number of Pages in PDF File: 23
Keywords: copula, goodness-of-fi t, signifi cance test, stochastic mortality, generation effect, reversionary annuity
JEL Classification: C12, C18, G22, J12working papers series
Date posted: July 5, 2012
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