Evolution of coupled lives' dependency across generations and pricing impact

Luciano, E., Spreeuw, J. & Vigna, E. (2012). Evolution of coupled lives' dependency across generations and pricing impact (Report No. Actuarial Research Paper No. 199). London, UK: Faculty of Actuarial Science & Insurance, City University London.

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Abstract

This paper studies the dependence between coupled lives - both within and across generations - and its effects on prices of reversionary annuities in the presence of longevity risk. Longevity risk is represented via a stochastic mortality intensity. Dependence is modelled through copula functions. We consider Archimedean single and multi-parameter copulas. We and that dependence decreases when passing from older generations to younger generations. Not only the level of dependence but also its features - as measured by the copula - change across generations: the best-fit Archimedean copula is not the same across generations. Moreover, for all the generations under exam the single-parameter copula is dominated by the two-parameter one. The independence assumption produces quantifiable mispricing of reversionary annuities. The misspecification of the copula produces different mispricing effects on different generations. The research is conducted using a well-known dataset of double life contracts.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: copula, goodness-of-fit, significance test, stochastic mortality, generation effect, reversionary annuity.
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Actuarial Science & Insurance > Faculty of Actuarial Science & Insurance Actuarial Research Reports
URI: http://openaccess.city.ac.uk/id/eprint/2330

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