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Evolution of coupled lives' dependency across generations and pricing impact

Luciano, E., Spreeuw, J. and 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.

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.

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