Multivariate Exponential Tilting and Pricing Implications for Mortality Securitization |
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| Authors: | Samuel H Cox Yijia Lin† Shaun Wang |
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| Institution: | Samuel H. Cox and Shaun Wang are with the department of risk management &insurance, Georgia State University, P.O. Box 4036, Atlanta, GA 30302-4036, USA; e-mail: .;Yijia Lin is with the department of accounting and finance at Youngstown State University, One University Plaza, Youngstown, OH 44555, USA. |
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| Abstract: | Normalized exponential tilting is an extension of classical theories, including the Capital Asset Pricing Model (CAPM) and the Black–Merton–Scholes model, to price risks with general‐shaped distributions. The need for changing multivariate probability measures arises in pricing contingent claims on multiple underlying assets or liabilities. In this article, we apply it to valuation of mortality‐based securities written on mortality indices of several countries. We show how to use multivariate exponential tilting to price the first pure mortality security, the Swiss Re bond. The same technique can be applied in other mortality securitization pricing. |
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