The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk
We investigate the impact of model uncertainty on hedging longevity risk with index-based derivatives and assessing longevity basis risk, which arises from the mismatch between the hedging instruments and the portfolio being hedged. We apply the bivariate Lee–Carter model, the common factor model, a...
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sg-ntu-dr.10356-1455792023-05-19T07:31:18Z The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk Balasooriya, Uditha Li, Johnny Siu-Hang Li, Jackie Nanyang Business School Business::General Index-based Longevity Hedging Longevity Basis Risk We investigate the impact of model uncertainty on hedging longevity risk with index-based derivatives and assessing longevity basis risk, which arises from the mismatch between the hedging instruments and the portfolio being hedged. We apply the bivariate Lee–Carter model, the common factor model, and the M7-M5 model, with separate cohort effects between the two populations, and various time series processes and simulation methods, to build index-based longevity hedges and measure the hedge effectiveness. Based on our modeling and simulations on hypothetical scenarios, the estimated levels of hedge effectiveness are around 50% to 80% for a large pension plan, and the model selection, particularly in dealing with the computed time series, plays a very important role in the estimation. We also experiment with a modified bootstrapping approach to incorporate the uncertainty of model selection into the modeling of longevity basis risk. The hedging results under this approach may approximately be seen as a “weighted” average of those calculated from the different model candidates. Published version 2020-12-29T06:05:37Z 2020-12-29T06:05:37Z 2020 Journal Article Balasooriya, U., Li, J. S.-H., & Li, J. (2020). The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk. Risks, 8(3), 80-. doi:10.3390/risks8030080 2227-9091 https://hdl.handle.net/10356/145579 10.3390/risks8030080 3 8 en Risks © 2020 The Authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/). application/pdf |
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Business::General Index-based Longevity Hedging Longevity Basis Risk Balasooriya, Uditha Li, Johnny Siu-Hang Li, Jackie The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
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We investigate the impact of model uncertainty on hedging longevity risk with index-based derivatives and assessing longevity basis risk, which arises from the mismatch between the hedging instruments and the portfolio being hedged. We apply the bivariate Lee–Carter model, the common factor model, and the M7-M5 model, with separate cohort effects between the two populations, and various time series processes and simulation methods, to build index-based longevity hedges and measure the hedge effectiveness. Based on our modeling and simulations on hypothetical scenarios, the estimated levels of hedge effectiveness are around 50% to 80% for a large pension plan, and the model selection, particularly in dealing with the computed time series, plays a very important role in the estimation. We also experiment with a modified bootstrapping approach to incorporate the uncertainty of model selection into the modeling of longevity basis risk. The hedging results under this approach may approximately be seen as a “weighted” average of those calculated from the different model candidates. |
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Nanyang Business School |
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Nanyang Business School Balasooriya, Uditha Li, Johnny Siu-Hang Li, Jackie |
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Article |
author |
Balasooriya, Uditha Li, Johnny Siu-Hang Li, Jackie |
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Balasooriya, Uditha |
title |
The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
title_short |
The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
title_full |
The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
title_fullStr |
The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
title_full_unstemmed |
The impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
title_sort |
impact of model uncertainty on index-based longevity hedging and measurement of longevity basis risk |
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2020 |
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https://hdl.handle.net/10356/145579 |
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1772828351437733888 |