The Research On Longevity Risk Bond Pricing Based On Stochastic Dynamic Mortality Model

With the extension of population life,life insurance companies and pension institutions are facing longevity risks,which also bring pressure to govements around the world.Longevity risk is a systematic risk that cannot be distributed through the law of large numbers and it is a common problem for every country in the world.In recent years people pay more attention to the mortality risk securitization.Longevity bonds have been issued abroad for several years.This paper uses the empirical data of Chinese mortality to design longevity risk bond and calculates the market price of risk on longevity bond.In this paper,the paradigm:the theoretical framework-reality examine-empirical analysis-policy framework,specifically,literature review-model basis-operating mechanism-pricing methods-empirical measure-implementation mechanism.Firstly,the paper uses the Chinese historical mortality data(mixed data from 0-89 year-old men and women),eight models from the popular LC system and CBD system stochastic mortality models are selected,that is,LC model,RH model,APC model,CBD model,M6 model,M7 model,M8 model and Plat model.Focusing on their properties,goodness of fit,model predictions on the quantitative and qualitative comparison,the APC model is finalized to be the most suitable stochastic model for predicting Chinese mortality definitely.Secondly,the paper makes a description of traditional management methods of longevity risk,e.g.natural hedge,pension buy-out/buy-in,and emerging capital market management approach,e.g.longevity bonds,longevity swaps,q-forward.On this basis we emphatically analyze experience of Swiss Re mortality bond and lesson of EIB longevity bond,discuss different types and construction methods of longevity bond.Then the paper designs a longevity bond including coupon and principal according to Chinese situation.Due to the limitation of traditional tools themselves,it cannot meet the full needs of transferring longevity risk.Researchers need to develop further understanding of how life market tools can be used effectively to manage longevity risk.As an effective hedging instrument,longevity bond could play an important role in the management of longevity risk.Our country should focus on the basis risk,credit risk,model parameters risk,and bond maturity in the design of longevity bonds.Thirdly,on the basis of comparing the traditional risk pricing method and the new method of bond pricing,the paper chooses the appropriate longevity bond pricing method and uses APC mortality model with permanent jump effect based on Chinese population dada.Empirical results show that the two-factor Wang transform,the LFC’s risk cubic model and the maximum entropy approach all give reasonable risk premiums respectively.However,the risk premiums of the LFC’s risk cubic model and the maximum entropy approach are generally higher than the two-factor Wang transform.Mortality model and pricing approach have important effect on risk premium of longevity bond.Risk-free interest rate and LIBOR also affect risk premium even though under the same mortality model and pricing method.We could consider a set of models to deal with the risk of model in pricing practice.Finally,the paper puts forward policy recommendations from three aspects of the regulatory mechanism,legal mechanism and government support for the establishment of a healthy longevity bond market in China.In terms of regulatory,some requirements should be clear such as regulatory body,the business scope and solvency of the SPV,strengthen information disclosure regulation,encouragement of the bond market development,a sound legal system,the issue of the main qualifications,the establishment of the legal environment for the SPV,improvement of the relevant bankruptcy law.The government should vigorously support the development of pension insurance market,improve the financial market,establish and improve the tax system,improve the prediction of mortality and mortality index,and so on.