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Multivariate Exponential Tilting and Pricing Implications for Mortality Securitization

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  • Samuel H. Cox
  • Yijia Lin
  • Shaun Wang

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

  • Samuel H. Cox & Yijia Lin & Shaun Wang, 2006. "Multivariate Exponential Tilting and Pricing Implications for Mortality Securitization," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 719-736, December.
    • Handle: RePEc:bla:jrinsu:v:73:y:2006:i:4:p:719-736
    DOI: 10.1111/j.1539-6975.2006.00196.x
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    References listed on IDEAS

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    1. Minton, Bernadette & Sanders, Anthony & Strahan, Philip E., 2004. "Securitization by Banks and Finance Companies: Efficient Financial Contracting or Regulatory Arbitrage?," Working Paper Series 2004-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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    3. Blake, D. & Cairns, A. J. G. & Dowd, K., 2006. "Living with Mortality: Longevity Bonds and Other Mortality-Linked Securities," British Actuarial Journal, Cambridge University Press, vol. 12(1), pages 153-197, March.
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