Modelling mortality dependence with regime-switching copulas. (English) Zbl 1458.91187

The author proposes a two-regime Markov switching copula to depict the evolution of mortality dependence. One regime represents periods of high dependence and the other regime represents periods of low dependence. Each regime features a regular vine (R-vine) copula built on bivariate copulas.
A regular vine \(V\) on \(n\) variables is a sequence of \(n-1\) connected trees \(T_1,T_2,\ldots,T_{n-1}\) and satisfies the following properties:
1. \(T_1\) is a tree with node set \(N_1=\{1,2,\ldots,n\}\) and edge set \(E_1.\)
2. \(T_i\) is a connected tree with node set \(N_i=E_{i-1},\) of which the cardinality is \(n- (i-1),\) and edge set \(E_i.\)
3. If two nodes in \(T_i,\) for \(i=2,\ldots,n-1,\) are joined by an edge, their corresponding edges in \(T_{i-1}\) must share a common node.
A case study is presented to illustrate how the regime-switching copula can be applied to assess the effectiveness of longevity risk hedge with different beliefs about future mortality dependence evolution incorporated.


91G05 Actuarial mathematics
91D20 Mathematical geography and demography
62P05 Applications of statistics to actuarial sciences and financial mathematics
62H05 Characterization and structure theory for multivariate probability distributions; copulas
Full Text: DOI Link


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