Abstract
Mortality volatility is crucially important to many aspects of index-based longevity hedging, including instrument pricing, hedge calibration and hedge performance evaluation. This paper sets out to develop a deeper understanding of mortality volatility and its implications on index-based longevity hedging. First, we study the potential asymmetry in mortality volatility by considering a wide range of generalised autoregressive conditional heteroskedasticity (GARCH)-type models that permit the volatility of mortality improvement to respond differently to positive and negative mortality shocks. We then investigate how the asymmetry of mortality volatility may impact index-based longevity hedging solutions by developing an extended longevity Greeks framework, which encompasses longevity Greeks for a wider range of GARCH-type models, an improved version of longevity vega, and a new longevity Greek known as dynamic Delta. Our theoretical work is complemented by two real-data illustrations, the results of which suggest that the effectiveness of an index-based longevity hedge could be significantly impaired if the asymmetry in mortality volatility is not taken into account when the hedge is calibrated.
Original language | English (US) |
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Pages (from-to) | 278-301 |
Number of pages | 24 |
Journal | Annals of Actuarial Science |
Volume | 14 |
Issue number | 2 |
DOIs | |
State | Published - Sep 1 2020 |
Keywords
- GARCH-type models
- Longevity Greeks
- S-forwards
- The Lee-Carter model
- Value-at-Risk
ASJC Scopus subject areas
- Statistics and Probability
- Economics and Econometrics
- Statistics, Probability and Uncertainty