A Multivariate Model of Strategic Asset Allocation with Longevity Risk

54 Pages Posted: 30 Jul 2015

See all articles by Emilio Bisetti

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST)

Carlo A. Favero

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

Giacomo Nocera

Audencia Business School

Claudio Tebaldi

Bocconi University - CAREFIN - Centre for Applied Research in Finance; Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: May 7, 2015

Abstract

Generalized unexpected raise in life expectancy is a source of aggregate risk. Longevity‐linked securities are a natural instrument to reallocate these risks by making them tradeable in the financial market. This paper extends the Campbell and Viceira (2005) strategic asset allocation model including a longevity‐linked investment possibility in addition to equity and fixed income securities. Estimation of the model, based on prices for standardized annuities publicly offered by US insurance companies, shows that aggregate shocks to survival probabilities are predictors for long term returns of the longevity linked securities, and reveals an unexpected predictability pattern. The empirical valuation of the market price of longevity risk 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 Favero, Carlo A. and Nocera, Giacomo and Tebaldi, Claudio, A Multivariate Model of Strategic Asset Allocation with Longevity Risk (May 7, 2015). Netspar Discussion Paper No. 05/2015-012, Available at SSRN: https://ssrn.com/abstract=2637789 or http://dx.doi.org/10.2139/ssrn.2637789

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong

Carlo A. Favero

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)

London
United Kingdom

Giacomo Nocera

Audencia Business School ( email )

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

Claudio Tebaldi (Contact Author)

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Roentgen 1
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

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