Centro de Documentacion de Fundación MAPFRE - Dynamic hedging of longevity risk : the effect of trading frequency

MAP20180005701

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. Título.