Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility

41 Pages Posted: 20 Aug 2009 Last revised: 12 Apr 2011

See all articles by Michael Sherris

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Australia Business School

Carolyn Njenga

University of New South Wales (UNSW) - School of Actuarial Studies

Date Written: August 19, 2009

Abstract

Longevity risk and the modeling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modeling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modeling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework.

Keywords: longevity risk, unit roots, VAR, VECM

JEL Classification: C01, C32, C52

Suggested Citation

Sherris, Michael and Njenga, Carolyn Ndigwako, Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility (August 19, 2009). UNSW Australian School of Business Research Paper No. 2009ACTL08. Available at SSRN: https://ssrn.com/abstract=1458084 or http://dx.doi.org/10.2139/ssrn.1458084

Michael Sherris (Contact Author)

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Australia Business School ( email )

Sydney, NSW 2052
Australia

Carolyn Ndigwako Njenga

University of New South Wales (UNSW) - School of Actuarial Studies ( email )

Sydney, NSW 2052
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
417
Abstract Views
2,568
rank
72,164
PlumX Metrics