Stochastic Modelling of Mortality and Financial Markets

29 Pages Posted: 5 Jul 2011 Last revised: 5 Apr 2013

See all articles by Helena Aro

Helena Aro

Aalto University - School of Science and Technology

Teemu Pennanen

Aalto University

Date Written: January 10, 2013

Abstract

The uncertain future development of mortality and financial markets affects the operation of every life insurer. In particular, the joint distribution of mortality and investment returns is crucial in pricing and hedging of mortality-linked securities and other life insurance products. This paper proposes simple stochastic models that are well suited for numerical analysis of mortality-linked cash flows. The models are calibrated with an extensive data set covering six countries and 56 years. Statistical analysis supports the known dependence of old-age mortality on GDP which, in turn, is connected to many sectors of financial markets. Our models allow for a simple quantitative description of such connections. Particular attention is paid to the long-term development of mortality rates, which is an important issue in life insurance markets.

Keywords: mortality risk, market risk, stochastic modelling

Suggested Citation

Aro, Helena and Pennanen, Teemu, Stochastic Modelling of Mortality and Financial Markets (January 10, 2013). Available at SSRN: https://ssrn.com/abstract=1879205 or http://dx.doi.org/10.2139/ssrn.1879205

Helena Aro (Contact Author)

Aalto University - School of Science and Technology ( email )

02015 Espoo
Finland

Teemu Pennanen

Aalto University ( email )

P.O. Box 21210
Helsinki 00100, 00101
Finland