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Securitization of longevity risk – survivor swap perspective

Securitization of longevity risk – survivor swap perspective PurposeThe purpose of this paper is to present a clear path to securitize the longevity risk with two distinct swaps in order to inspire a new Chinese life market.Design/methodology/approachStudies on longevity risk securitization consist of three aspects, respectively, instrument design, pricing methodology and mortality projection. The swaps designed are referenced, respectively, to vanilla and complex survivor swaps (Dowd et al., 2006; Lin and Cox, 2005). Methods applied are RHH model and Gompertz law for mortality projection, as well as two-factor Wang transformation for pricing.FindingsThis paper figures out the market price of risk in Chinese annuity market, checks for the sensitivity of the price to parameters and tests the hedging effects by Monte Carlo simulation.Originality/valueBased on the theoretical and numerical results, this paper suggests an effective way to possibly witness the birth of New Life Market in China. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Reviewinternational Emerald Publishing

Securitization of longevity risk – survivor swap perspective

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
2044-1398
DOI
10.1108/CFRI-06-2015-0092
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to present a clear path to securitize the longevity risk with two distinct swaps in order to inspire a new Chinese life market.Design/methodology/approachStudies on longevity risk securitization consist of three aspects, respectively, instrument design, pricing methodology and mortality projection. The swaps designed are referenced, respectively, to vanilla and complex survivor swaps (Dowd et al., 2006; Lin and Cox, 2005). Methods applied are RHH model and Gompertz law for mortality projection, as well as two-factor Wang transformation for pricing.FindingsThis paper figures out the market price of risk in Chinese annuity market, checks for the sensitivity of the price to parameters and tests the hedging effects by Monte Carlo simulation.Originality/valueBased on the theoretical and numerical results, this paper suggests an effective way to possibly witness the birth of New Life Market in China.

Journal

China Finance Reviewinternational – Emerald Publishing

Published: Nov 21, 2016

References

  • Survivor bonds: helping to hedge mortality risk
  • Living with mortality: longevity bonds and other mortality-linked securities
  • The new life market
  • Pricing frameworks for securitization of mortality risk
  • A quantitative comparison of stochastic mortality models using data from England and Wales and the United States