Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios

31 Pages Posted: 4 Jul 2013

See all articles by Charles Sutcliffe

Charles Sutcliffe

University of Reading - ICMA Centre

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Date Written: June 30, 2013

Abstract

Annuities are perceived as being illiquid financial instruments, and this has limited their attractiveness to consumers and inclusion in financial models. However, short positions in annuities can be replicated using life insurance and debt, permitting long positions in annuities to be offset, or short annuity positions to be created. The implications of this result for the annuity puzzle, arbitrage between the annuity and life insurance markets, and speculation on expected longevity are investigated. It is argued that annuity replication could help solve the annuity puzzle, improve the price efficiency of annuity markets and promote the inclusion of annuities in household portfolios.

Keywords: Annuities, annuity puzzle, arbitrage, longevity, speculation, portfolios, life insurance

JEL Classification: G12, G22, G23

Suggested Citation

Sutcliffe, Charles M., Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios (June 30, 2013). Available at SSRN: https://ssrn.com/abstract=2289250 or http://dx.doi.org/10.2139/ssrn.2289250

Charles M. Sutcliffe (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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