Bargaining for Over-the-Counter Risk Redistributions: The Case of Longevity Risk

CentER Discussion Paper Series No. 2012-090

32 Pages Posted: 28 Nov 2012

See all articles by Tim J. Boonen

Tim J. Boonen

University of Amsterdam

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Henk Norde

Tilburg University - Center For Economic Research; Tilburg University - Department of Econometrics & Operations Research

Date Written: November 28, 2012

Abstract

Existing literature regarding the natural hedge potential that arises from combining liabilities with different sensitivities focuses on the optimal liability mix, but does not address the question whether and how changes in the liability mix can be obtained. In the absence of a well-functioning market, parties could change their liability mix through Over-the-Counter risk redistributions. This, however, requires that each involved party benefits (weakly) from the redistribution. In this paper we first show that under relatively mild conditions, there is more than one risk redistribution that satisfies this criterion. We then explicitly model the bargaining process by which firms will agree to a particular redistribution. We allow for heterogeneous beliefs regarding the underlying probability distribution, which may arise from using different models to predict future mortality rates. We use this model to quantify the potential benefits.

Keywords: longevity risk, bargaining, risk redistribution, over-the-counter trade

JEL Classification: C71, C78, G22, J11

Suggested Citation

Boonen, Tim J. and De Waegenaere, Anja M.B. and Norde, Henk W., Bargaining for Over-the-Counter Risk Redistributions: The Case of Longevity Risk (November 28, 2012). CentER Discussion Paper Series No. 2012-090. Available at SSRN: https://ssrn.com/abstract=2181934 or http://dx.doi.org/10.2139/ssrn.2181934

Tim J. Boonen (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/b/o/t.j.boonen/t.j.boonen.html

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Henk W. Norde

Tilburg University - Center For Economic Research ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3245 (Phone)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

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