The paper focuses on the securitization of longevity risk through mortality-linked securities. Alternative mortality-linked securities have been proposed in literature (see Cairns-Blake-Dowd (2006)) and among these we considered the longevity bond as the most appropriate to hedge longevity risk. The paper aims at comparing two different approaches used for the pricing of mortality-linked securities: one based on the Wang transform and the other based on the classical arbitrage-free pricing framework used for financial derivatives. The pricing models are applied to the Italian annuity market. We underline the critical features of each method mainly due to the incompleteness of the mortality securities market and to the lack of a secondary annuity market in Italy, necessary to calibrate the considered pricing approaches. Each approach is applied to the case study adopting a Lee-Carter log-bilinear model to represent the evolution of mortality. Finally, we calculate the risk adjusted market price of a longevity bond with constant fixed coupons.

Longevity Bond Pricing Models: an Application to the Italian Annuity Market and Pension Schemes / Levantesi, S; Menzietti, Massimiliano; Torri, T.. - In: GIORNALE DELL'ISTITUTO ITALIANO DEGLI ATTUARI. - ISSN 0390-5780. - 72(2009), pp. 123-145.

Longevity Bond Pricing Models: an Application to the Italian Annuity Market and Pension Schemes

MENZIETTI, MASSIMILIANO;
2009

Abstract

The paper focuses on the securitization of longevity risk through mortality-linked securities. Alternative mortality-linked securities have been proposed in literature (see Cairns-Blake-Dowd (2006)) and among these we considered the longevity bond as the most appropriate to hedge longevity risk. The paper aims at comparing two different approaches used for the pricing of mortality-linked securities: one based on the Wang transform and the other based on the classical arbitrage-free pricing framework used for financial derivatives. The pricing models are applied to the Italian annuity market. We underline the critical features of each method mainly due to the incompleteness of the mortality securities market and to the lack of a secondary annuity market in Italy, necessary to calibrate the considered pricing approaches. Each approach is applied to the case study adopting a Lee-Carter log-bilinear model to represent the evolution of mortality. Finally, we calculate the risk adjusted market price of a longevity bond with constant fixed coupons.
Stochastic mortality; Longevity risk; Longevity bonds
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.11770/153840
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