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Longevity bond pricing under the threshold CIR model

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  • Dong, Fangyuan
  • Wong, Hoi Ying

Abstract

While mean reversion is a well-documented feature in interest rate and commodity prices, empirical studies show that the long-term mean level and the mean reversion rate are not persistent in time. This paper introduces a threshold Cox–Ingersol–Ross (TCIR) model in which a regime shift is determined endogenously by the underlying financial asset. We derive the joint moment-generating function (MGF) of the terminal TCIR value and an average of it. The MGF enables us to value risk-free bonds and Longevity bonds analytically.

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  • Dong, Fangyuan & Wong, Hoi Ying, 2015. "Longevity bond pricing under the threshold CIR model," Finance Research Letters, Elsevier, vol. 15(C), pages 195-207.
    • Handle: RePEc:eee:finlet:v:15:y:2015:i:c:p:195-207
    DOI: 10.1016/j.frl.2015.09.010
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    References listed on IDEAS

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    Cited by:

    1. Ewald, Christian-Oliver & Zhang, Aihua, 2017. "On the effects of changing mortality patterns on investment, labour and consumption under uncertainty," Insurance: Mathematics and Economics, Elsevier, vol. 73(C), pages 105-115.

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