Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios
31 Pages Posted: 4 Jul 2013
Date Written: June 30, 2013
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: Suggested Citation