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
Date Written: June 27, 2010
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: Suggested Citation