Longevity Bonds: Financial Engineering, Valuation, and Hedging |
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| Authors: | David Blake rew Cairns Kevin Dowd Richard MacMinn |
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| Institution: | The authors are from: The Pensions Institute, Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom;Maxwell Institute for Mathematical Sciences and Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh, EH14 4AS, United Kingdom;Centre for Risk and Insurance Studies, Nottingham University Business School, Nottingham, NG8 1BB, United Kingdom;and Katie School, College of Business, Illinois State University, United States; e-mail: . |
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| Abstract: | This article examines the main characteristics of longevity bonds (LBs) and shows that they can take a large variety of forms which can vary enormously in their sensitivities to longevity shocks. We examine different ways of financially engineering LBs and consider problems arising from the dearth of ultra‐long government bonds and the choice of the reference population index. The article also looks at valuation issues in an incomplete markets context and finishes with an examination of how LBs can be used as a risk management tool for hedging longevity risks. |
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