A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions

Atsuyuki Kogure; Yoshiyuki Kurachi

doi:10.1016/j.insmatheco.2009.10.005

A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions

Atsuyuki Kogure, Yoshiyuki Kurachi

Faculty of Policy Management

Research output: Contribution to journal › Article › peer-review

43 Citations (Scopus)

Abstract

We present a Bayesian approach to pricing longevity risk under the framework of the Lee-Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates.

Original language	English
Pages (from-to)	162-172
Number of pages	11
Journal	Insurance: Mathematics and Economics
Volume	46
Issue number	1
DOIs	https://doi.org/10.1016/j.insmatheco.2009.10.005
Publication status	Published - 2010 Feb

Keywords

Bayesian approach
Japanese mortality rates
Maximum entropy principle
Pricing longevity risk
Risk-neutral predictive distribution

ASJC Scopus subject areas

Statistics and Probability
Economics and Econometrics
Statistics, Probability and Uncertainty

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10.1016/j.insmatheco.2009.10.005

Cite this

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abstract = "We present a Bayesian approach to pricing longevity risk under the framework of the Lee-Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates.",

keywords = "Bayesian approach, Japanese mortality rates, Maximum entropy principle, Pricing longevity risk, Risk-neutral predictive distribution",

author = "Atsuyuki Kogure and Yoshiyuki Kurachi",

note = "Funding Information: The present research was supported by KAKENHI through a Grant-in-Aid (No. 19530285). ",

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N2 - We present a Bayesian approach to pricing longevity risk under the framework of the Lee-Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates.

AB - We present a Bayesian approach to pricing longevity risk under the framework of the Lee-Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates.

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KW - Maximum entropy principle

KW - Pricing longevity risk

KW - Risk-neutral predictive distribution

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A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions

Abstract

Keywords

ASJC Scopus subject areas

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