A Multivariate Model of Strategic Asset Allocation with Longevity Risk. (31st October 2017)

• Record Type: Journal Article
• Authors: Bisetti, Emilio; Favero, Carlo A.; Nocera, Giacomo; Tebaldi, Claudio
• Is Part Of: Journal of financial and quantitative analysis. Volume 52:Number 5(2017)
• Page Start: 2251
• Page End: 2275
• Publication Date: 2017-10-31
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109017000692
• Languages: English
• ISSNs: 0022-1090

Abstract

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.