Macquarie University
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Market Pricing of Longevity-linked Securities

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posted on 2022-03-28, 18:48 authored by Sixian Tang
One way of mitigating longevity risk is constructing a hedge using longevity - or mortality - linked securities. A fundamental question is how to price these securities in an incomplete life market where liabilities are not liquidly traded. Although there are various pricing methods developed in the literature, there has been no consensus on which one is the best and the choice is often based on user's preference. This article investigates the potential impact of uncertainty arising from the choice of mortality models and pricing rules on the calculation of longevity - l inked security prices. Twelve premium principles based on risk - neutral and real - world measures are examined under the Lee - Carter model and a generalisation of the CBD model. The quotations of UK pension annuities are set as the calibration constraints to incorporate the market view of longevity risk. We compare the results between different pricing methods and model assumptions on the prices of S-forwards and longevity swaps with different maturities. Overall, w efind that the pricing rule uncertainty is less material than the mortality model uncertainty. Particularly, the relationships between the results from different premium principles tend to rely on the underlying mortality model assumption. Our results suggest that the Lee - Carter mode l tends to give higher implied risk premiums than the CBD model does for both S - forwards and longevity swaps. Besides, the risk premiums calculated by the risk - neutral pricing methods are often lower than those by methods with real - world probabilities, while the results are more comparable within each of the two families.


Table of Contents

1. Introduction -- 2. Literature review -- 3. Methodology -- 4. Empirical and theoretical analyses of pricing principles under different mortality model assumptions -- 5. Sensitivity tests -- 6. Concluding remarks.


Theoretical thesis. Bibliography: pages 45-53

Awarding Institution

Macquarie University

Degree Type

Thesis MRes


MRes, Macquarie University, Faculty of Business and Economics, Department of Actuarial Studies and Business Analytics

Department, Centre or School

Department of Actuarial Studies and Business Analytics

Year of Award


Principal Supervisor

Jackie Li


Copyright Sixian Tang 2019. Copyright disclaimer:




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