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http://dx.doi.org/10.5351/KJAS.2015.28.3.393

A Two Factor Model with Mean Reverting Process for Stochastic Mortality  

Lee, Kangsoo (Korea Insurance Development Institute)
Jho, Jae Hoon (School of International Economics and Business, Yeungnam University)
Publication Information
The Korean Journal of Applied Statistics / v.28, no.3, 2015 , pp. 393-406 More about this Journal
Abstract
We examine how to model mortality risk using the adaptation of the mean-reverting processes for the two factor model proposed by Cairns et al. (2006b). Mortality improvements have been recently observed in some countries such as United Kingdom; therefore, we assume long-run mortality converges towards a trend at some unknown time and the mean-reverting processes could therefore be an appropriate stochastic model. We estimate the parameters of the two-factor model incorporated with mean-reverting processes by a Metropolis-Hastings algorithm to fit United Kingdom mortality data from 1991 to 2015. We forecast the evolution of the mortality from 2014 to 2040 based on the estimation results in order to evaluate the issue price of a longevity bond of 25 years maturity. As an application, we propose a method to quantify the speed of mortality improvement by the average mean reverting times of the processes.
Keywords
two factor mortality model; mean reverting stochastic process; mortality improvement; Metropolis algorithm; longevity bond;
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Times Cited By KSCI : 1  (Citation Analysis)
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