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Key Q-Duration: A Framework for Hedging Longevity Risk

Published online by Cambridge University Press:  09 August 2013

Johnny Siu-Hang Li  and
Ancheng Luo
Ancheng Luo
Affiliation:
Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario, Canada, N2L3G1, Email: a2luo@uwaterloo.ca
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Abstract

When hedging longevity risk with standardized contracts, the hedger needs to calibrate the hedge carefully so that it can effectively reduce the risk. In this article, we present a calibration method that is based on matching mortality rate sensitivities. Specifically, we introduce a measure called key q-duration, which allows us to estimate the price sensitivity of a life-contingent liability to each portion of the underlying mortality curve. Given this measure, one can easily construct a longevity hedge with a small number of q-forward contracts. We further propose an extension for hedging the longevity risk associated with multiple birth cohorts, and another extension for accommodating population basis risk.

Keywords

Cairns-Blake-Dowd modelq-forwardsSecuritization

Information

Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 42 , Issue 2 , November 2012 , pp. 413 - 452
Copyright
Copyright © International Actuarial Association 2012

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