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Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios

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  • Charles Sutcliffe

    (ICMA Centre, Henley Business School, University of Reading)

Abstract

Annuities are perceived as being illiquid financial instruments, and this has limited their attractiveness to consumers and inclusion in financial models. However, short positions in annuities can be replicated using life insurance and debt, permitting long positions in annuities to be offset, or short annuity positions to be created. The implications of this result for the annuity puzzle, arbitrage between the annuity and life insurance markets, and speculation on expected longevity are investigated. It is argued that annuity replication could help solve the annuity puzzle, improve the price efficiency of annuity markets and promote the inclusion of annuities in household portfolios

Suggested Citation

  • Charles Sutcliffe, 2013. "Trading Death: The Implications of Annuity Replication for the Annuity Puzzle, Arbitrage, Speculation and Portfolios," ICMA Centre Discussion Papers in Finance icma-dp2013-06, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2013-06
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    2. Dong, Bing & Xu, Wei & Sevic, Aleksandar & Sevic, Zeljko, 2020. "Efficient willow tree method for variable annuities valuation and risk management☆," International Review of Financial Analysis, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Annuities; annuity puzzle; arbitrage; longevity; speculation; portfolios; life insurance;
    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

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