Longevity/Mortality Risk Modeling and Securities Pricing

25 Pages Posted: 23 Aug 2012

See all articles by Yinglu Deng

Yinglu Deng

Red McCombs School of Business

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management

Richard D. MacMinn

National Chengchi University; The University of Texas

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

Securitizing longevity/mortality risk can transfer longevity/mortality risk to capital markets. Modeling and forecasting mortality rate is key to pricing mortality‐linked securities. Catastrophic mortality and longevity jumps occur in historical data and have an important impact on security pricing. This article introduces a stochastic diffusion model with a double‐exponential jump diffusion process that captures both asymmetric rate jumps up and down and also cohort effect in mortality trends. The model exhibits calibration advantages and mathematical tractability while better fitting the data. The model provides a closed‐form pricing solution for J.P. Morgan’s q‐forward contract usable as a building block for hedging.

Suggested Citation

Deng, Yinglu and Brockett, Patrick L. and MacMinn, Richard D., Longevity/Mortality Risk Modeling and Securities Pricing (September 2012). Journal of Risk and Insurance, Vol. 79, Issue 3, pp. 697-721, 2012, Available at SSRN: https://ssrn.com/abstract=2134741 or http://dx.doi.org/10.1111/j.1539-6975.2011.01450.x

Yinglu Deng

Red McCombs School of Business ( email )

CBA 5.202
Austin, TX 78712
United States

Patrick L. Brockett

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States

Richard D. MacMinn

National Chengchi University ( email )

Taipei
Taiwan

The University of Texas ( email )

2317 Speedway
Austin, TX 78712
United States

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