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Pricing longevity risk with the parametric bootstrap: a maximum entropy approach. (English) Zbl 1231.91441

Summary: In recent years, there has been significant development in the securitization of longevity risk. Various methods for pricing longevity risk have been proposed. In this paper we present an alternative pricing method, which is based on the maximization of the Shannon entropy in physics. Specifically, we propose implementing this pricing method with the parametric bootstrap [N. Brouhns, M. Denuit, I. van Keilegom, Scand. Actuar. J. 2005, No. 3, 212–224 (2005; Zbl 1092.91038)], which is highly flexible and can be performed under different model assumptions. Through this pricing method we also quantify the impact of cohort effects and parameter uncertainty on prices of mortality-linked securities. Numerical illustrations based on longevity bonds with different maturities are provided.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
91B30 Risk theory, insurance (MSC2010)
91G40 Credit risk

Citations:

Zbl 1092.91038

Software:

Human Mortality
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