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THE PRICING OF MORTALITY-LINKED CONTINGENT CLAIMS: AN EQUILIBRIUM APPROACH

Published online by Cambridge University Press:  18 June 2013

Jeffrey T. Tsai  and
Larry Y. Tzeng
Jeffrey T. Tsai*
Affiliation:
Department of Quantitative Finance, National Tsing Hua University, 101, Sec. 2, Kuang-Fu Rd., Hsinchu, Taiwan30013, and Risk and Insurance Research Center, National Chengchi University, Taipei 116, Taiwan, Republic of China
Larry Y. Tzeng
Affiliation:
Department of Finance, National Taiwan University, Taipei 106, Taiwan, and Risk and Insurance Research Center, National Chengchi University, Taipei 116, Taiwan, Republic of China E-Mail: [email protected]
*
E-Mail: [email protected]
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Abstract

This study introduces an equilibrium approach to price mortality-linked securities in a discrete time economy, assuming that the mortality rate has a transformed normal distribution. This pricing method complements current studies on the valuation of mortality-linked securities, which only have discrete trading opportunities and insufficient market trading data. Like the Wang transform, the valuation relationship is still risk-neutral (preference-free) and the mortality-linked security is priced as the expected value of its terminal payoff, discounted by the risk-free rate. This study provides an example of pricing the Swiss Re mortality bond issued in 2003 and obtains an approximated closed-form solution.

Keywords

Longevity riskmortality-linked security valuationtransform normal distribution
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 43 , Issue 2 , May 2013 , pp. 97 - 121
Copyright
Copyright © ASTIN Bulletin 2013 

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