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

Atsuyuki Kogure, Yoshiyuki Kurachi

Research output: Contribution to journalArticle

33 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 languageEnglish
Pages (from-to)162-172
Number of pages11
JournalInsurance: Mathematics and Economics
Volume46
Issue number1
DOIs
Publication statusPublished - 2010 Feb 1

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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