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The Sluggish and Asymmetric Reaction of Life Annuity Prices to Changes in Interest Rates
Author(s) -
Charupat Narat,
Kamstra Mark J.,
Milevsky Moshe A.
Publication year - 2016
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/jori.12061
Subject(s) - annuity , economics , interest rate , bond , monetary economics , life annuity , econometrics , financial economics , actuarial science , finance , pension
Many assume that in the short run, annuity prices promptly and efficiently respond to changes in interest rates. Using a unique database of quotes, we show this is not the case. Prices are less sensitive to changes in rates than expected, and responses are asymmetric. Prices react more rapidly and with greater sensitivity to an increase than to a decrease in rates. The results are robust, but there is a small degree of heterogeneity in the responses of different insurance companies. When rates increase, larger firms are slightly quicker to improve prices. The opposite is true when rates decline. In sum, we show that the microstructure of annuity dynamics is more complicated than (simply) adding mortality credits to bond yields.