Asymmetry in mortality volatility and its implications on index-based longevity hedging

Kenneth Q. Zhou, Johnny Siu Hang Li

Research output: Contribution to journalArticlepeer-review

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 languageEnglish (US)
Pages (from-to)278-301
Number of pages24
JournalAnnals of Actuarial Science
Volume14
Issue number2
DOIs
StatePublished - 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

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