Modeling Mortality with Jumps: Applications to Mortality Securitization

25 Pages Posted: 13 Oct 2009

See all articles by Hua Chen

Hua Chen

University of Hawaiʻi at Mānoa

Samuel H. Cox

University of Manitoba - Asper School of Business

Abstract

In this article, we incorporate a jump process into the original Lee–Carter model, and use it to forecast mortality rates and analyze mortality securitization. We explore alternative models with transitory versus permanent jump effects and find that modeling mortality via transitory jump effects may be more appropriate in mortality securitization. We use the Swiss Re mortality bond in 2003 as an example to show how to apply our model together with the distortion measure approach to value mortality-linked securities. Pricing the Swiss Re mortality bond is challenging because the mortality index is correlated across countries and over time. Cox, Lin, and Wang (2006) employ the normalized multivariate exponential tilting to take into account correlations across countries, but the problem of correlation over time remains unsolved. We show in this article how to account for the correlations of the mortality index over time by simulating the mortality index and changing the measure on paths.

Suggested Citation

Chen, Hua and Cox, Samuel H., Modeling Mortality with Jumps: Applications to Mortality Securitization. Journal of Risk and Insurance, Vol. 76, Issue 3, pp. 727-751, September 2009. Available at SSRN: https://ssrn.com/abstract=1487234 or http://dx.doi.org/10.1111/j.1539-6975.2009.01313.x

Hua Chen

University of Hawaiʻi at Mānoa ( email )

2404 Maile Way, E-602e
Honolulu, HI 96822
United States
(808) 956-8063 (Phone)
(808) 956-9887 (Fax)

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

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