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Longevity-linked assets and pre-retirement consumption/portfolio decisions

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  • Menoncin, Francesco
  • Regis, Luca

Abstract

We solve the consumption/investment problem of an agent facing a stochastic mortality intensity. The investment set includes a longevity-linked asset, as a derivative on the force of mortality. In a complete and frictionless market, we derive a closed form solution when the agent has Hyperbolic Absolute Risk Aversion preferences and a fixed financial horizon. Our calibrated numerical analysis on US data shows that individuals optimally invest a large fraction of their wealth in longevity-linked assets in the pre-retirement phase, because of their need to hedge against stochastic fluctuations in their remaining life-time at retirement.

Suggested Citation

  • Menoncin, Francesco & Regis, Luca, 2017. "Longevity-linked assets and pre-retirement consumption/portfolio decisions," Insurance: Mathematics and Economics, Elsevier, vol. 76(C), pages 75-86.
    • Handle: RePEc:eee:insuma:v:76:y:2017:i:c:p:75-86
    DOI: 10.1016/j.insmatheco.2017.07.002
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    Cited by:

    1. Francesco Menoncin & Sergio Vergalli, 2021. "Optimal stopping time, consumption, labour, and portfolio decision for a pension scheme," Journal of Economics, Springer, vol. 132(1), pages 67-98, January.
    2. Menoncin, Francesco & Regis, Luca, 2020. "Optimal life-cycle labour supply, consumption, and investment: The role of longevity-linked assets," Journal of Banking & Finance, Elsevier, vol. 120(C).
    3. Milevsky, Moshe A., 2020. "Calibrating Gompertz in reverse: What is your longevity-risk-adjusted global age?," Insurance: Mathematics and Economics, Elsevier, vol. 92(C), pages 147-161.
    4. Ankush Agarwal & Christian-Oliver Ewald & Yongjie Wang, 2023. "Hedging longevity risk in defined contribution pension schemes," Computational Management Science, Springer, vol. 20(1), pages 1-34, December.
    5. Schmeck, Maren Diane & Schmidli, Hanspeter, 2019. "Mortality Options: the Point of View of an Insurer," Center for Mathematical Economics Working Papers 616, Center for Mathematical Economics, Bielefeld University.
    6. Schmeck, Maren Diane & Schmidli, Hanspeter, 2021. "Mortality options: The point of view of an insurer," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 98-115.
    7. Park, Kyunghyun & Wong, Hoi Ying & Yan, Tingjin, 2023. "Robust retirement and life insurance with inflation risk and model ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 110(C), pages 1-30.
    8. Ankush Agarwal & Christian-Oliver Ewald & Yongjie Wang, 2020. "Sharing of longevity basis risk in pension schemes with income-drawdown guarantees," Papers 2002.05232, arXiv.org.
    9. Andreas Lichtenstern & Pavel V. Shevchenko & Rudi Zagst, 2019. "Optimal life-cycle consumption and investment decisions under age-dependent risk preferences," Papers 1908.09976, arXiv.org.

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