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Market Price of Longevity Risk for a Multi‐Cohort Mortality Model With Application to Longevity Bond Option Pricing
Author(s) -
Xu Yajing,
Sherris Michael,
Ziveyi Jonathan
Publication year - 2020
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.12273
Subject(s) - longevity risk , longevity , coupon , bond , economics , zero coupon bond , arbitrage , econometrics , bond valuation , financial economics , market price , affine term structure model , actuarial science , pension , finance , yield curve , medicine , gerontology
We introduce a multi‐cohort continuous time affine mortality model and, along with an affine arbitrage‐free term structure model, determine implied market prices of longevity risk in the BlackRock CoRI Retirement Indexes. These indexes provide a daily level of estimated cost of lifetime retirement income for 20 cohorts in the United States. Individuals can invest in BlackRock funds that track the indexes that are quoted on the NYSE. We use our model to derive closed‐form expressions for prices of European options on longevity zero‐coupon bonds and show the impact of stochastic mortality on long‐term longevity bond option prices.