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A Multivariate Model of Strategic Asset Allocation with Longevity Risk

Published online by Cambridge University Press:  31 October 2017

Emilio Bisetti ,
Carlo A. Favero ,
Giacomo Nocera  and
Claudio Tebaldi
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Abstract

Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate that risk. This paper extends the standard Campbell–Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by U.S. insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 2251 - 2275
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank an anonymous referee, Enrico Biffis, Stephen Brown (the editor), Burton Hollifield, and Sergio Paci for valuable comments, the participants to the 2015 WU Gutmann Center Symposium: Retirement and Asset Management and the discussant Marcel Fischer, the participants to the 2015 International Pension Workshop Netspar in Amsterdam, and in particular Bertrand Melenberg (the discussant) for useful insights. The usual disclaimer applies. This paper was initially submitted on May 8, 2015.

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