The Distribution of Future Annuity Prices under Interest-Rate and Longevity Risks

Pension Institute Discussion Paper No. PI-0823

25 Pages Posted: 10 Feb 2009

See all articles by Kevin Dowd

Kevin Dowd

Nottingham University Business School (NUBS)

David P. Blake

City University London - Cass Business School

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

Date Written: August 24, 2008

Abstract

This paper examines the impact of interest-rate risk and longevity risk on the distribution of annuity prices in the distant future. To so, the paper uses a computationally efficient algorithm that simulates the state variables out to the end of the horizon period and then uses a Taylor series approximation to compute approximate annuity prices at the end of that period. Illustrative results suggest that annuity prices are likely to rise considerably, but are also quite uncertain. These findings have some unpleasant implications for future pensioners and those who will have to look after them.

Keywords: longevity risk, interest-rate risk, annuity prices, Taylor series

Suggested Citation

Dowd, Kevin and Blake, David P. and Cairns, Andrew J. G., The Distribution of Future Annuity Prices under Interest-Rate and Longevity Risks (August 24, 2008). Pension Institute Discussion Paper No. PI-0823. Available at SSRN: https://ssrn.com/abstract=1339941 or http://dx.doi.org/10.2139/ssrn.1339941

Kevin Dowd (Contact Author)

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

David P. Blake

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

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