|
|||||
|
|
Longevity/Mortality Risk Modeling and Securities Pricing |
|
| Authors: | Yinglu Deng Patrick L Brockett Richard D MacMinn |
| Institution: | Yinglu Deng is at Department of Finance, School of Economics and Management, Tsinghua University. Patrick L. Brockett is at Department of Information, Risk, and Operations Management, Red McCombs School of Business, The University of Texas at Austin. Richard D. MacMinn is at Katie School of Insurance, College of Business, Illinois State University. The authors can be contacted via e‐mail: dengyinglu@gmail.com, brockett@mail.utexas.edu, and richard.macminn@ilstu.edu, respectively. |
| Abstract: | Securitizing longevity/mortality risk can transfer longevity/mortality risk to capital markets. Modeling and forecasting mortality rate is key to pricing mortality‐linked securities. Catastrophic mortality and longevity jumps occur in historical data and have an important impact on security pricing. This article introduces a stochastic diffusion model with a double‐exponential jump diffusion process that captures both asymmetric rate jumps up and down and also cohort effect in mortality trends. The model exhibits calibration advantages and mathematical tractability while better fitting the data. The model provides a closed‐form pricing solution for J.P. Morgan’s q‐forward contract usable as a building block for hedging. |
| Keywords: | |