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Hedging Annuity Risks with the Age-Period-Cohort Two-Population Gravity Model

Dowd, K., Cairns, A. J. G. and Blake, D. (2018). Hedging Annuity Risks with the Age-Period-Cohort Two-Population Gravity Model. North American Actuarial Journal,

Abstract

We consider the effectiveness of an illustrative annuity hedging problem in which a forward annuity predicated on one population is hedged by a position in a forward annuity predicated on another population. Our analysis makes use of the age-period-cohort two-population gravity model that takes account of the observed inter-dependence between the two populations’ mortality rates; it also considers the implications of parameter uncertainty, individual death or Poisson risk and interest-rate risk for hedge effectiveness. We consider horizons of up to 20 years. For the most part, our results are robust and indicate strong hedge effectiveness, with estimates of relative risk reduction varying from about 0.70 in the least effective case to well over 0.95 in the most effective cases.

Publication Type: Article
Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in 'North American Actuarial Journal' on 2018, available online: https://www.tandfonline.com/toc/uaaj20/current.
Publisher Keywords: hedging, longevity risk, annuity, age-period-cohort two-population gravity model
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/20461
[img] Text - Accepted Version
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