Mortality dependence and longevity bond pricing : a dynamic factor copula mortality model with the GAS structure

Hua CHEN, Richard D. MACMINN, Tao SUN

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

4 Citations (Scopus)

Abstract

Modeling mortality dependence for multiple populations has significant implications for mortality/longevity risk management. A natural way to assess multivariate dependence is to use copula models. The application of copula models in the multipopulation mortality analysis, however, is still in its infancy. In this article, we present a dynamic multipopulation mortality model based on a two-factor copula and capture the time-varying dependence using the generalized autoregressive score (GAS) framework. Our model is simple and flexible in terms of model specification and is widely applicable to high dimension data. Using the Swiss Re Kortis longevity trend bond as an example, we use our model to estimate the probability distribution of principal reduction and some risk measures such as probability of first loss, conditional expected loss, and expected loss. Due to the similarity in the structure and design of CAT bonds and mortality/longevity bonds, we borrow CAT bond pricing techniques for mortality/longevity bond pricing. We find that our pricing model generates par spreads that are close to the actual spreads of previously issued mortality/longevity bonds.
Original languageEnglish
Pages (from-to)393-415
Number of pages23
JournalJournal of Risk and Insurance
Volume84
Issue numberS1
Early online date10 Apr 2017
DOIs
Publication statusPublished - Apr 2017
Externally publishedYes

Fingerprint

Dynamic factor
Copula
Bond pricing
Mortality
Expected loss
Probability distribution
Factors
Model specification
Modeling
Risk management
Risk measures
Longevity risk
Time-varying

Cite this

@article{6b3c736dfb254a33b4eb600fa9add720,
title = "Mortality dependence and longevity bond pricing : a dynamic factor copula mortality model with the GAS structure",
abstract = "Modeling mortality dependence for multiple populations has significant implications for mortality/longevity risk management. A natural way to assess multivariate dependence is to use copula models. The application of copula models in the multipopulation mortality analysis, however, is still in its infancy. In this article, we present a dynamic multipopulation mortality model based on a two-factor copula and capture the time-varying dependence using the generalized autoregressive score (GAS) framework. Our model is simple and flexible in terms of model specification and is widely applicable to high dimension data. Using the Swiss Re Kortis longevity trend bond as an example, we use our model to estimate the probability distribution of principal reduction and some risk measures such as probability of first loss, conditional expected loss, and expected loss. Due to the similarity in the structure and design of CAT bonds and mortality/longevity bonds, we borrow CAT bond pricing techniques for mortality/longevity bond pricing. We find that our pricing model generates par spreads that are close to the actual spreads of previously issued mortality/longevity bonds.",
author = "Hua CHEN and MACMINN, {Richard D.} and Tao SUN",
year = "2017",
month = "4",
doi = "10.1111/jori.12214",
language = "English",
volume = "84",
pages = "393--415",
journal = "Journal of Risk and Insurance",
issn = "0022-4367",
publisher = "Wiley-Blackwell Publishing Ltd",
number = "S1",

}

Mortality dependence and longevity bond pricing : a dynamic factor copula mortality model with the GAS structure. / CHEN, Hua; MACMINN, Richard D.; SUN, Tao.

In: Journal of Risk and Insurance, Vol. 84, No. S1, 04.2017, p. 393-415.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

TY - JOUR

T1 - Mortality dependence and longevity bond pricing : a dynamic factor copula mortality model with the GAS structure

AU - CHEN, Hua

AU - MACMINN, Richard D.

AU - SUN, Tao

PY - 2017/4

Y1 - 2017/4

N2 - Modeling mortality dependence for multiple populations has significant implications for mortality/longevity risk management. A natural way to assess multivariate dependence is to use copula models. The application of copula models in the multipopulation mortality analysis, however, is still in its infancy. In this article, we present a dynamic multipopulation mortality model based on a two-factor copula and capture the time-varying dependence using the generalized autoregressive score (GAS) framework. Our model is simple and flexible in terms of model specification and is widely applicable to high dimension data. Using the Swiss Re Kortis longevity trend bond as an example, we use our model to estimate the probability distribution of principal reduction and some risk measures such as probability of first loss, conditional expected loss, and expected loss. Due to the similarity in the structure and design of CAT bonds and mortality/longevity bonds, we borrow CAT bond pricing techniques for mortality/longevity bond pricing. We find that our pricing model generates par spreads that are close to the actual spreads of previously issued mortality/longevity bonds.

AB - Modeling mortality dependence for multiple populations has significant implications for mortality/longevity risk management. A natural way to assess multivariate dependence is to use copula models. The application of copula models in the multipopulation mortality analysis, however, is still in its infancy. In this article, we present a dynamic multipopulation mortality model based on a two-factor copula and capture the time-varying dependence using the generalized autoregressive score (GAS) framework. Our model is simple and flexible in terms of model specification and is widely applicable to high dimension data. Using the Swiss Re Kortis longevity trend bond as an example, we use our model to estimate the probability distribution of principal reduction and some risk measures such as probability of first loss, conditional expected loss, and expected loss. Due to the similarity in the structure and design of CAT bonds and mortality/longevity bonds, we borrow CAT bond pricing techniques for mortality/longevity bond pricing. We find that our pricing model generates par spreads that are close to the actual spreads of previously issued mortality/longevity bonds.

UR - http://commons.ln.edu.hk/sw_master/5946

U2 - 10.1111/jori.12214

DO - 10.1111/jori.12214

M3 - Journal Article (refereed)

VL - 84

SP - 393

EP - 415

JO - Journal of Risk and Insurance

JF - Journal of Risk and Insurance

SN - 0022-4367

IS - S1

ER -