48 Pages Posted: 24 May 2014
Date Written: May 22, 2014
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: 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
By Andrew Ang