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    Parametric mortality indexes: From index construction to hedging strategies

    Access Status
    Fulltext not available
    Authors
    Tan, C.I.
    Li, Ka Ki Jackie
    Li, J.S.
    Balasooriya, U.
    Date
    2014
    Type
    Journal Article
    
    Metadata
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    Citation
    Tan, C.I. and Li, K.K.J. and Li, J.S. and Balasooriya, U. 2014. Parametric mortality indexes: From index construction to hedging strategies. Insurance: Mathematics and Economics. 59: pp. 285-299.
    Source Title
    Insurance: Mathematics and Economics
    DOI
    10.1016/j.insmatheco.2014.10.005
    ISSN
    0167-6687
    School
    Department of Mathematics and Statistics
    URI
    http://hdl.handle.net/20.500.11937/18922
    Collection
    • Curtin Research Publications
    Abstract

    In this paper, we investigate the construction of mortality indexes using the time-varying parametersin common stochastic mortality models. We first study how existing models can be adapted to satisfy the new-data-invariant property, a property that is required to ensure the resulting mortality indexes are tractable by market participants. Among the collection of adapted models, we find that the adapted Model M7 (the Cairns–Blake–Dowd model with cohort and quadratic age effects) is the most suitable model for constructing mortality indexes. One basis of this conclusion is that the adapted model M7 gives the best fitting and forecasting performance when applied to data over the age range of 40–90 for various populations. Another basis is that the three time-varying parameters in it are highly interpretable and rich in information content. Based on the three indexes created from this model, one can write a standardized mortality derivative called K-forward, which can be used to hedge longevity risk exposures. Another contribution of this paper is a method called key K-duration that permits one to calibrate a longevity hedge formed by K-forward contracts. Our numerical illustrations indicate that a K-forward hedge has a potential to outperform a q-forward hedge in terms of the number of hedging instruments required.

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