TY - JOUR
T1 - Longevity Greeks
T2 - What Do Insurers and Capital Market Investors Need to Know?
AU - Zhou, Kenneth Q.
AU - Li, Johnny Siu Hang
N1 - Funding Information:
This work is supported by the Society of Actuaries Center of Actuarial Excellence Programme and the Natural Sciences and Engineering Research Council of Canada.
Publisher Copyright:
© 2019 Society of Actuaries.
PY - 2021
Y1 - 2021
N2 - Recently, it has been argued that capital markets may share some of the overwhelming longevity risk exposures borne by the pension and life insurance industries. The transfer of risk can be accomplished by trading standardized derivatives such as q-forwards that are linked to published mortality indexes. To strategize such trades, one may utilize longevity Greeks, which are analogous to equity Greeks that have been used extensively in managing stock price risk. In this article, we first derive three important longevity Greeks—delta, gamma, and vega—on the basis of an extended version of the Lee-Carter model that incorporates stochastic volatility. We then study the properties of each longevity Greek and estimate the levels of effectiveness that different longevity Greek hedges can possibly achieve. The results reveal several interesting facts; for example, in a delta–vega hedge formed by q-forwards, the choice of reference ages does not materially affect hedge effectiveness, but the choice of times to maturity does. These facts may aid insurers to better formulate their hedge portfolios and issuers of mortality-linked securities to determine what security structures are more likely to attract liquidity.
AB - Recently, it has been argued that capital markets may share some of the overwhelming longevity risk exposures borne by the pension and life insurance industries. The transfer of risk can be accomplished by trading standardized derivatives such as q-forwards that are linked to published mortality indexes. To strategize such trades, one may utilize longevity Greeks, which are analogous to equity Greeks that have been used extensively in managing stock price risk. In this article, we first derive three important longevity Greeks—delta, gamma, and vega—on the basis of an extended version of the Lee-Carter model that incorporates stochastic volatility. We then study the properties of each longevity Greek and estimate the levels of effectiveness that different longevity Greek hedges can possibly achieve. The results reveal several interesting facts; for example, in a delta–vega hedge formed by q-forwards, the choice of reference ages does not materially affect hedge effectiveness, but the choice of times to maturity does. These facts may aid insurers to better formulate their hedge portfolios and issuers of mortality-linked securities to determine what security structures are more likely to attract liquidity.
UR - http://www.scopus.com/inward/record.url?scp=85075462640&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85075462640&partnerID=8YFLogxK
U2 - 10.1080/10920277.2019.1650283
DO - 10.1080/10920277.2019.1650283
M3 - Article
AN - SCOPUS:85075462640
SN - 1092-0277
VL - 25
SP - S66-S96
JO - North American Actuarial Journal
JF - North American Actuarial Journal
IS - S1
ER -