1 Department of Economics and Business Economics - Center for Research in Econometric Analysis of Time Series (CREATES), Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 HEC Montréal (Université de Montréal)3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
An application to longevity risk management
This paper proposes a unified framework for measuring and managing longevity risk. Specifically, we develop a flexible framework for valuing survivor derivatives like forwards, and swaps, as well as options both of European and American style. Our framework is essentially independent of the assumed underlying dynamics and the choice of method for risk neutralization and relies only on the ability to simulate from the risk neutral process. We provide an application to derivatives on the survivor index when the underlying dynamics are from a Lee-Carter model. Our results show that taking the optionality into consideration is important from a pricing perspective.
Insurance: Mathematics and Economics, 2013, Vol 52, Issue 1, p. 35-45
Least squares Monte Carlo; Longevity risk; Reinsurance; Simulation