Towards a large and liquid longevity market: A graphical population basis risk metric

Wai Sum Chan, Johnny S.H. Li, Kenneth Q. Zhou, Rui Zhou

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

Pension plan sponsors and annuity providers can offload their longevity risk exposures by trading securities that are linked to broad-based mortality indexes. However, a hedge constructed in this way is subject to population basis risk, arising from the difference in mortality improvements between the hedger's population and the reference population to which the security is linked. To address this problem, which is believed to be a major obstacle to market development, in this paper we contribute a graphical population basis risk metric. The graphical metric allows market participants to not only visually evaluate the extent of population basis risk, but also determine the most appropriate reference population. We illustrate this concept with a hypothetical example.

Original languageEnglish (US)
Pages (from-to)118-127
Number of pages10
JournalGeneva Papers on Risk and Insurance: Issues and Practice
Volume41
Issue number1
DOIs
StatePublished - Jan 1 2016
Externally publishedYes

Keywords

  • basis risk
  • longevity risk
  • prediction regions

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics

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