Multivariate Exponential Tilting and Pricing Implications for Mortality Securitization

18 Pages Posted: 29 Nov 2006

See all articles by Samuel H. Cox

Samuel H. Cox

University of Manitoba - Asper School of Business

Yijia Lin

University of Nebraska at Lincoln - Department of Finance

Shaun Wang

Georgia State University's Robinson College of Business

Abstract

Normalized exponential tilting is an extension of classical theories, including the Capital Asset Pricing Model (CAPM) and the Black-Merton-Scholes model, to price risks with general-shaped distributions. The need for changing multivariate probability measures arises in pricing contingent claims on multiple underlying assets or liabilities. In this article, we apply it to valuation of mortality-based securities written on mortality indices of several countries. We show how to use multivariate exponential tilting to price the first pure mortality security, the Swiss Re bond. The same technique can be applied in other mortality securitization pricing.

Suggested Citation

Cox, Samuel H. and Lin, Yijia and Wang, Shaun S., Multivariate Exponential Tilting and Pricing Implications for Mortality Securitization. Journal of Risk & Insurance, Vol. 73, No. 4, pp. 719-736, December 2006. Available at SSRN: https://ssrn.com/abstract=947963 or http://dx.doi.org/10.1111/j.1539-6975.2006.00196.x

Samuel H. Cox (Contact Author)

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Yijia Lin

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

Shaun S. Wang

Georgia State University's Robinson College of Business ( email )

P.O. Box 4036
Atlanta, GA 30302-4036
United States
404-413-7486 (Phone)
404-413-7499 (Fax)

HOME PAGE: http://www.rmi.gsu.edu/Faculty/pages/wang.htm

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