Mortality Regimes and Pricing

North American Actuarial Journal, Vol. 15, No. 2, pp. 266-289, 2011

41 Pages Posted: 9 Nov 2009 Last revised: 5 Sep 2011

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Samuel H. Cox

University of Manitoba - Asper School of Business

Date Written: June 27, 2010

Abstract

Mortality dynamics are characterized by changes in mortality regimes. This paper describes a Markov regime switching model which incorporates mortality state switches into mortality dynamics. Using the 1901-2005 US population mortality data, we illustrate that regime switching models perform better than well-known models in the literature. Furthermore, we extend the Lee-Carter (1992) model in such a way that the error term of the time-series common factor has distinct mortality regimes with different means and volatilities. Finally, we show how to price mortality securities with this model.

Keywords: Lee-Cater model, regime switching mortality model, mortality-linked securities

JEL Classification: C02, C13, G22, G23

Suggested Citation

Milidonis, Andreas and Lin, Yijia and Cox, Samuel H., Mortality Regimes and Pricing (June 27, 2010). North American Actuarial Journal, Vol. 15, No. 2, pp. 266-289, 2011. Available at SSRN: https://ssrn.com/abstract=1418514

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Yijia Lin

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

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