A Multivariate Model of Strategic Asset Allocation with Longevity Risk

48 Pages Posted: 24 May 2014  

Emilio Bisetti

Carnegie Mellon University - David A. Tepper School of Business

Giacomo Nocera

Audencia Business School

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Claudio Tebaldi

Bocconi University, IGIER and CAREFIN

Multiple version iconThere are 3 versions of this paper

Date Written: May 22, 2014

Abstract

This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of Campbell and Viceira (2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates. The empirical valuation of the market price of longevity risk, based on prices for standardized annuities publicly offered by US insurance companies, confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.

Keywords: Longevity Risk, Strategic Asset Allocation

JEL Classification: G11, G12, G22

Suggested Citation

Bisetti, Emilio and Nocera, Giacomo and Favero, Carlo A. and Tebaldi, Claudio, A Multivariate Model of Strategic Asset Allocation with Longevity Risk (May 22, 2014). Available at SSRN: https://ssrn.com/abstract=2440795 or http://dx.doi.org/10.2139/ssrn.2440795

Emilio Bisetti

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Giacomo Nocera

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Carlo A. Favero (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Claudio Tebaldi

Bocconi University, IGIER and CAREFIN ( email )

Via Roentgen 1
Milan, 20136
Italy

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