Basis Risk in Static vs. Dynamic Longevity Risk Hedging

Carlo Alberto Notebooks, n.425

31 Pages Posted: 5 Dec 2015

See all articles by Clemente De Rosa

Clemente De Rosa

University of Turin - Collegio Carlo Alberto

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Luca Regis

University of Turin

Date Written: October 20, 2015

Abstract

This paper provides a simple model for basis risk in a longevity framework, by separating common and idiosyncratic risk factors. Basis risk is captured by a single parameter, that measures the co-movement between the portfolio and the reference population. In this framework, the paper sets out the static, swap-based hedge for an annuity, and compares it with the dynamic, delta-based hedge, achieved using longevity bonds. We assume that the longevity intensity is distributed according to a CIR-type process and provide closed-form derivatives prices and hedges, also in the presence of an analogous CIR process for interest rate risk.

Keywords: longevity risk, basis risk, static vs. dynamic hedging, longevity swaps, longevity bonds

JEL Classification: G22, G32

Suggested Citation

De Rosa, Clemente and Luciano, Elisa and Regis, Luca, Basis Risk in Static vs. Dynamic Longevity Risk Hedging (October 20, 2015). Carlo Alberto Notebooks, n.425, Available at SSRN: https://ssrn.com/abstract=2635401 or http://dx.doi.org/10.2139/ssrn.2635401

Clemente De Rosa

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Luca Regis (Contact Author)

University of Turin ( email )

Corso Unione Sovietica 218 bis
Torino, Turin 10100
Italy

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