Summary:
For pricing any contingent claim that depends on financial risks and mortality an assumption has to be made about the dependency structure between the two sources of risk. It is often assumed that those two sources of risk are independent – a very strong assumption which might not always be satisfied. In this paper we consider annuity prices and the fair value of pension buyout contracts using a model in which interest rates, asset prices and mortality rates experience common shocks to investigate the impact of the (violation of the) independence assumption on pricing.
Publication:
This research was first published in the ASTIN Bulletin: The Journal of the IAA on the 30th of March 2023.
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Authors:
Ayşe Arık Department of Actuarial Mathematics and Statistics, Heriot-Watt University, and The Maxwell Institute for Mathematical Sciences, Edinburgh, UK
Ömür Uğur Institute of Applied Mathematics, Middle East Technical University, 06800 Ankara, Turkey
Torsten Kleinow of The Research Centre for Longevity Risk, Faculty of Economics and Business, University of Amsterdam
Keywords:
Defined benefit pension plan; mortality; jump diffusion models; pension buyout; mortality and financial markets