Longevity Bonds: Financial Engineering, Valuation, and Hedging

26 Pages Posted: 29 Nov 2006

See all articles by David P. Blake

David P. Blake

City University London - Cass Business School

Kevin Dowd

Nottingham University Business School (NUBS)

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

Richard D. MacMinn

National Chengchi University; The University of Texas

Abstract

This article examines the main characteristics of longevity bonds (LBs) and shows that they can take a large variety of forms which can vary enormously in their sensitivities to longevity shocks. We examine different ways of financially engineering LBs and consider problems arising from the dearth of ultra-long government bonds and the choice of the reference population index. The article also looks at valuation issues in an incomplete markets context and finishes with an examination of how LBs can be used as a risk management tool for hedging longevity risks.

Suggested Citation

Blake, David P. and Dowd, Kevin and Cairns, Andrew J. G. and MacMinn, Richard D., Longevity Bonds: Financial Engineering, Valuation, and Hedging. Journal of Risk & Insurance, Vol. 73, No. 4, pp. 647-672, December 2006. Available at SSRN: https://ssrn.com/abstract=947960 or http://dx.doi.org/10.1111/j.1539-6975.2006.00193.x

David P. Blake (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

Richard D. MacMinn

National Chengchi University ( email )

Taipei
Taiwan

The University of Texas ( email )

2317 Speedway
Austin, TX 78712
United States

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