Securitization of Longevity Risk Using Percentile Tranching |
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| Authors: | Changki Kim Yangho Choi |
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| Affiliation: | 1. Changki Kim is at the Korea University Business School;2. Yangho Choi is at the Applied Mathematics Department, Kettering University. Kim can be contacted via e‐mail: changki@korea.ac.kr. |
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| Abstract: | Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches. |
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