Evolution of Coupled Lives' Dependency Across Generations and Pricing Impact

23 Pages Posted: 5 Jul 2012

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Jaap Spreeuw

City University London - Sir John Cass Business School

Elena Vigna

University of Turin - Faculty of Economics; Collegio Carlo Alberto; CeRP

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2012

Abstract

This paper studies the dependence between coupled lives - both within and across generations - and its effects on prices of reversionary annuities in the presence of longevity risk. Longevity risk is represented via a stochastic mortality intensity. Dependence is modeled through copula functions. We consider Archimedean single and multi-parameter copulas. We fi…nd that dependence decreases when passing from older generations to younger generations. Not only the level of dependence but also its features - as measured by the copula - change across generations: the best-fi…t Archimedean copula is not the same across generations. Moreover, for all the generations under exam the single-parameter copula is dominated by the two-parameter one. The independence assumption produces quantifi…able mispricing of reversionary annuities. The misspeci…cation of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.

Keywords: copula, goodness-of-fi…t, signifi…cance test, stochastic mortality, generation effect, reversionary annuity

JEL Classification: C12, C18, G22, J12

Suggested Citation

Luciano, Elisa and Spreeuw, Jaap and Vigna, Elena, Evolution of Coupled Lives' Dependency Across Generations and Pricing Impact (May 25, 2012). Available at SSRN: https://ssrn.com/abstract=2100465 or http://dx.doi.org/10.2139/ssrn.2100465

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Jaap Spreeuw (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Elena Vigna

University of Turin - Faculty of Economics ( email )

Dipartimento di Statistica e Matematica Applicata
Corso Unione Sovietica 218 bis
Torino, 10134
Italy

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

CeRP ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

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