Modeling Multi-Country Longevity Risk with Mortality Dependence: A Lévy Subordinated Hierarchical Archimedean Copulas (LSHAC) Approach

Journal of Risk and Insurance, 84, 477-493.

23 Pages Posted: 4 Oct 2015 Last revised: 11 Feb 2020

See all articles by Wenjun Zhu

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Ken Seng Tan

University of Waterloo

Chou‐Wen Wang

National Kaohsiung University of Science and Technology

Date Written: April 15, 2015

Abstract

This paper proposes a new copula model known as the Lévy subordinated hierarchical Archimedean copulas (LSHAC) for multi-country mortality dependence modeling. To the best of our knowledge, this is the first paper to apply the LSHAC model to mortality studies. Through an extensive empirical analysis on modelling mortality experiences of 13 countries, we demonstrate that the LSHAC model, which has the advantage of capturing the geographical structure of mortality data, yields better fit, comparing to the elliptical copulas. In addition, the proposed LSHAC model generates out-of-sample forecasts with smaller standard deviations, when compared to other benchmark copula models. The LSHAC model also confirms that there is an association between geographical locations and dependence of the overall mortality improvement. These results yield new insights into future longevity risk management. Finally, the model is used to price a hypothetical survival index swap written on a weighted mortality index. The results highlight the importance of dependence modeling in managing longevity risk and reducing population basis risk.

Keywords: Geographical Mortality Dependence; Longevity Securitization; Hierarchical Archimedean copulas; Lévy subordinators

JEL Classification: I12, C13, C15

Suggested Citation

Zhu, Wenjun and Tan, Ken Seng and Wang, Chou‐Wen, Modeling Multi-Country Longevity Risk with Mortality Dependence: A Lévy Subordinated Hierarchical Archimedean Copulas (LSHAC) Approach (April 15, 2015). Journal of Risk and Insurance, 84, 477-493., Available at SSRN: https://ssrn.com/abstract=2663979 or http://dx.doi.org/10.2139/ssrn.2663979

Wenjun Zhu (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Chou‐Wen Wang

National Kaohsiung University of Science and Technology ( email )

2 Jhuoyue Rd.
Nanzih
Kaohsiung City, Taiwan 811
Taiwan

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