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Mortality regimes and pricing. (English) Zbl 1228.91043

Summary: Mortality dynamics are characterized by changes in mortality regimes. This paper describes a Markov regime-switching model that incorporates mortality state switches into mortality dynamics. Using the 1901–2005 U.S. population mortality data, we illustrate that regime-switching models can perform better than well-known models in the literature. Furthermore, we extend the 1992 Lee-Carter model in such a way that the time-series common risk factor to all cohorts has distinct mortality regimes with different means and volatilities. Finally, we show how to price mortality securities with this model.

MSC:

91B30 Risk theory, insurance (MSC2010)
62P05 Applications of statistics to actuarial sciences and financial mathematics
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