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Pricing Survivor Derivatives With Cohort Mortality Dependence Under the Lee–Carter Framework
Author(s) -
Wang ChouWen,
Yang Sharon S.
Publication year - 2013
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2012.01488.x
Subject(s) - cohort , valuation (finance) , cohort effect , medicine , demography , actuarial science , economics , sociology , finance
A BSTRACT This article introduces cohort mortality dependence in mortality modeling. We extend the classical Lee–Carter model to incorporate cohort mortality dependence by considering mortality correlations for a cohort of people born in the same year. The pattern of cohort mortality dependence is demonstrated on the basis of U.S. mortality experience. We study the effect of cohort mortality dependence on the pricing of survivor derivatives. For this purpose, a survivor floor is introduced. To understand the difference between a survivor floor and other survivor securities, the valuation formulas for survivor swaps and survivor floors are all derived in detail and the effects of cohort mortality dependence on pricing survivor derivatives are investigated numerically.