Journal of Risk & Insurance · 2012 · 78 citations · 28 references
EngineeringFinancial Risk ManagementRisk AnalysisFinancial MathematicsStochastic SimulationCalibration AdvantagesAsset PricingRisk ManagementStatisticsFinancial ModelingOptimal Investment SecurityEconomicsQuantitative FinanceDerivative PricingStochastic VolatilityFinanceStochastic ModelingLongevity/mortality RiskFinancial EconomicsBusinessLongevity JumpsInterest Rate ModelingFinancial Risk
Securitizing longevity and mortality risk transfers such risk to capital markets, and accurate mortality forecasting is essential for pricing mortality‑linked securities, especially given historical catastrophic jumps that significantly affect pricing. The article aims to introduce a stochastic diffusion model that captures asymmetric mortality jumps and cohort effects. The model employs a double‑exponential jump diffusion process within a stochastic diffusion framework to represent upward and downward rate jumps and cohort trends. The model offers calibration advantages, mathematical tractability, improved data fit, and delivers a closed‑form pricing solution for J.P.
Abstract Securitizing longevity/mortality risk can transfer longevity/mortality risk to capital markets. Modeling and forecasting mortality rate is key to pricing mortality‐linked securities. Catastrophic mortality and longevity jumps occur in historical data and have an important impact on security pricing. This article introduces a stochastic diffusion model with a double‐exponential jump diffusion process that captures both asymmetric rate jumps up and down and also cohort effect in mortality trends. The model exhibits calibration advantages and mathematical tractability while better fitting the data. The model provides a closed‐form pricing solution for J.P. Morgan’s q‐forward contract usable as a building block for hedging.
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Modeling and Forecasting U.S. Mortality
Ronald Lee, Lawrence R. Carter · Journal of the American Statistical Association · 1992 · 1.8K citations