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Consistent Dynamic Affine Mortality Model for Longevity Risk Applications

Author

Listed:
  • Craig Blackburn

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Michael Sherris

    (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

Abstract

This paper proposes and assesses consistent multi-factor dynamic affine mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves. The framework includes an arbitrage-free model specification. There are multiple risk factors allowing applications to hedging and pricing mortality and longevity bonds, mortality derivatives and more general risk management problems. A state-space representation is used to estimate parameters for the model with the Kalman filter. A 3-factor model specification is shown to provide a good fit to the observed survival curves especially for older ages, and performs better than the 2-factor models. Consistent models are shown to improve model performance and stability.

Suggested Citation

  • Craig Blackburn & Michael Sherris, 2011. "Consistent Dynamic Affine Mortality Model for Longevity Risk Applications," Working Papers 201107, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    • Handle: RePEc:asb:wpaper:201107
    as

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    File URL: http://cepar.edu.au/media/48733/Longevity%20Risk%20Applications.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Mortality model; longevity risk; multi-factor; affine; arbitrage-free; consistent; Kalman filter; Swedish mortality;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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