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Mortality Regimes and Pricing

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  • Andreas Milidonis
  • Yijia Lin
  • Samuel Cox

Abstract

Mortality dynamics are characterized by changes in mortality regimes. This paper describes a Markov regime-switching model that incorporates mortality state switches into mortality dynamics. Using the 1901-2005 U.S. population mortality data, we illustrate that regime-switching models can perform better than well-known models in the literature. Furthermore, we extend the 1992 Lee-Carter model in such a way that the time-series common risk factor to all cohorts has distinct mortality regimes with different means and volatilities. Finally, we show how to price mortality securities with this model.

Suggested Citation

  • Andreas Milidonis & Yijia Lin & Samuel Cox, 2011. "Mortality Regimes and Pricing," North American Actuarial Journal, Taylor & Francis Journals, vol. 15(2), pages 266-289.
    • Handle: RePEc:taf:uaajxx:v:15:y:2011:i:2:p:266-289
    DOI: 10.1080/10920277.2011.10597621
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