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Dynamic hedging of longevity risk : the effect of trading frequency

Recurso electrónico / electronic resource
MAP20180005701
Li, Hong
Dynamic hedging of longevity risk : the effect of trading frequency / Hong Li
Sumario: This paper investigates dynamic hedging strategies for pension and annuity liabilities that are exposed to longevity risk. In particular, we consider a hedger who wishes to minimize the variance of her hedging error using index-based longevity-linked derivatives. To cope with the fact that liquidity of longevitylinked derivatives is still limited, we consider a liquidity constrained case where the hedger can only trade longevity-linked derivatives at a frequency lower than other assets. Time-consistent, closed-form solutions of optimal hedging strategies are obtained under a forward mortality framework. In the numerical illustration, we show that lowering the trading of the longevity-linked derivatives to a 2-year frequency only leads to a slight loss of the hedging performance. Moreover, even when the longevity-linked derivatives are traded at a very low (5-year) frequency, dynamic hedging strategies still significantly outperform the static one
En: Astin bulletin. - Belgium : ASTIN and AFIR Sections of the International Actuarial Association = ISSN 0515-0361. - 01/01/2018 Volumen 48 Número 1 - enero 2018 , p. 197-232
1. Pensiones . 2. Longevidad . 3. Evaluación de riesgos . 4. Modelos actuariales . 5. Valoración de riesgos . I. Title.