Canonical Valuation of Mortality‐Linked Securities |
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| Authors: | Johnny Siu‐Hang Li Andrew Cheuk‐Yin Ng |
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| Institution: | Johnny Siu‐Hang Li is Fairfax Chair in Risk Management at the Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, Canada, N2L 3G1. Andrew Cheuk‐Yin Ng is Assistant Professor at the Department of Finance, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong. The authors can be contacted via e‐mail: shli@uwaterloo.ca and andrewng@baf.msmail.cuhk.edu.hk, respectively. This work is supported by a discovery grant from the Natural Science and Engineering Research Council of Canada. The authors are grateful to the editor and the three anonymous referees of this article for their invaluable comments and suggestions. An earlier version of this article was presented in the AFIR Colloquium 2009. The authors would also like to acknowledge the stimulating discussions with the participants of the colloquium. |
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| Abstract: | A fundamental question in the study of mortality‐linked securities is how to place a value on them. This is still an open question, partly because there is a lack of liquidly traded longevity indexes or securities from which we can infer the market price of risk. This article develops a framework for pricing mortality‐linked securities on the basis of canonical valuation. This framework is largely nonparametric, helping us avoid parameter and model risk, which may be significant in other pricing methods. The framework is then applied to a mortality‐linked security, and the results are compared against those derived from other methods. |
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