Time-consistent mean-variance hedging of longevity risk: Effect of cointegration

Tat Wing WONG, Mei Choi CHIU, Hoi Ying WONG

Research output: Contribution to journalArticles

23 Citations (Scopus)

Abstract

This paper investigates the time-consistent dynamic mean–variance hedging of longevity risk with a longevity security contingent on a mortality index or the national mortality. Using an HJB framework, we solve the hedging problem in which insurance liabilities follow a doubly stochastic Poisson process with an intensity rate that is correlated and cointegrated to the index mortality rate. The derived closed-form optimal hedging policy articulates the important role of cointegration in longevity hedging. We show numerically that a time-consistent hedging policy is a smoother function in time when compared with its time-inconsistent counterpart. Copyright © 2014 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)56-67
JournalInsurance: Mathematics and Economics
Volume56
DOIs
Publication statusPublished - May 2014

Citation

Wong, T. W., Chiu, M. C., & Wong, H. Y. (2014). Time-consistent mean-variance hedging of longevity risk: Effect of cointegration. Insurance: Mathematics and Economics, 56, 56-67.

Keywords

  • Longevity risk
  • Basis risk
  • Cointegration
  • Stochastic mortality

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