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RESEARCH

INTEREST

Mortality-Linked Security Pricing
Mortality/Longevity Risk Measurement & Management
 
 

Mortality Modeling & Forecasting

 
Description
  • Longevity risk arises from the following two sources of uncertainty:

    • "Diffusion Risk": the variation surrounding the trend in future mortality; 

    • "Drift Risk": the uncertainty about the trend itself.

  • Traditional mortality models capture only "diffusion risk", but not "drift risk".​

  • The locally linear Cairns-Blake-Dowd (LLCBD) model is designed to quantify "drift risk" in addition to "diffusion risk".

    • In LLCBD model, we permit the drifts of the expected mortality trend to be random.

    • The Kalman filtering technique is used to estimate the parameters.

    • The resulting forecasts are more consistent with the recent trends.

Description
Illustration
LLCBD1.png

The 95% prediction intervals of the period effects in the original CBD model (in yellow) and the LLCBD model (in blue). 

Illustration

Related Paper
  • Liu, Y. and Li, J.S.-H., 2017. The locally-linear Cairns-Blake-Dowd model: A note on delta-nuga hedging of longevity risk. ASTIN Bulletin 47: 79-151.

Related Paper
LLCBD MODEL
 
Description
  • The heat wave model is designed to capture both long-term and short-term mortality improvements, and to produce two-dimensional improvement scales with minimal subjective judgement.

    • Short-term mortality improvements are treated as `heat waves' that taper off over time.

    • Long-term mortality improvements are treated as `background improvements' that always exist.

    • Estimation can be achieved through MLE, and the uncertainty of the forecast of mortality improvement rates can be quantified.

Description
Illustration
CIA-HeatWave.jpg

The heat map of the expected mortality improvement rates implied by the heat wave model.

Illustration

HEAT WAVE MODEL
Related Paper
  • Li, J.S.-H., and Liu, Y., 2018. The Heat Wave Model for Constructing Two-Dimensional Mortality Improvement Scales with Measures of Uncertainty. Under Review.

Related Paper
 
Description
  • The dynamics of human mortality over time are subject to short-term jumps (e.g., influenza pandemics).

  • In my research, I look at the age pattern of mortality jumps, that is, how the effect of a mortality jump is distributed among different ages.

  • It is found that the age patterns of mortality jumps are not uniform over age and exhibit certain degrees of variation. These properties cannot be reflected in the traditional jump models that are based on aggregate mortality indexes.

  • Two jump models have been proposed to address the above issue. 

  • Moreover, we found that the age pattern of jump effects has a huge impact on the pricing of catastrophic mortality bonds.

Description
Illustration
AgePatternJump.png
  • Model J0: jump effects and general period effects have identical age pattern (solid line).

  • Model J2: jump effects (red dotted line) and general period effects (blue dashed line) have different age patterns.

Illustration

MODEL WITH JUMP EFFECTS
MODEL WITH JUMP EFFECTS
Related Paper
  • Liu, Y. and Li, J.S.-H., 2015. The age pattern of transitory mortality jumps and its impact on the pricing of catastrophic mortality bonds. Insurance: Mathematics and Economics 64: 135-150.

Related Paper
 

Mortality-Linked Security Pricing

  • The method of canonical valuation is a fully non-parametric pricing method introduced by Stutzer (1996). The approach we consider is a semi-parametric variant (Li, 2010; Chen et al., 2013a).

  • The canonical valuation method is very useful in retrieving the risk-neutral probabilities from the market data, which can then be used in the pricing of mortality-linked securities. 

  • Alternative methods include the Wang transform (e.g., Chen and Cox, 2009) and the Esscher transform (e.g., Chuang and Brockett, 2014).

Description
Description
CANONICAL VALUATION
CANONICAL VALUATION
Related Paper
  • Liu, Y. and Li, J.S.-H., 2015. The age pattern of transitory mortality jumps and its impact on the pricing of catastrophic mortality bonds. Insurance: Mathematics and Economics 64: 135-150.

  • Liu, Y., Li, J.S.-H. and Ng, A.C.-Y., 2015. Option pricing under GARCH models with Hansen's skewed-t distributed innovations. North American Journal of Economics and Finance 31: 108-125.

Related Paper
 
 

Mortality/Longevity Risk Measurement & Management

 
  • The traditional "delta" or "delta-nuga" hedging methods aim to reduce the hedger's exposure to diffusion and drift risks.

    • They are subject to a few limitations, including the constraints on linearity and liquidity.  ​

  • The generalized state space (GSS) hedging method overcomes the issues on linearity and liquidity.

    • The GSS hedging method is based on variance minimization.

    • The GSS hedging method can be used as long as the underlying model has a state space representation.

    • In comparison to the traditional delta and delta–nuga methods, the GSS method is more flexible in terms of the number and type of hedging instruments.

    • Under certain conditions, the GSS hedging method degenerates to the traditional delta and delta–nuga hedging methods.

Description
Description
Related Paper
  • Liu, Y. and Li, J.S.-H., 2017. The locally-linear Cairns-Blake-Dowd model: A note on delta-nuga hedging of longevity risk. ASTIN Bulletin 47: 79-151.

Related Paper
GSS HEDGING METHOD
GSS HEDGING METHOD
BASIS RISK
BASIS RISK
  • ​Hedging with index-based mortality derivatives gives rise to population basis risk. More specifically, population basis risk arises from the mismatch in mortality experience between (i) the population associated with the hedger and (ii) the population associated with the index used for hedging purposes.

  • In my research, I have derived an analytical decomposition of the hedge portfolio variance, through which population basis risk can be measured and managed explicitly.

Description
Description
Related Paper
  • Liu, Y. and Li, J.S.-H., 2016. It's all in the hidden states: A longevity hedging strategy with an explicit measure of population basis risk. Insurance: Mathematics and Economics 70: 301-319.

Related Paper
 
 
COHORT EFFECT
COHORT EFFECT
  • Cohort (year-of-birth) effect, describes the variations in mortality experience for individuals born in different years.

  • Existing index-based hedging strategies mitigate risks associated with period effects, but often overlook cohort effects.

  • In my research, I study how standardized q-forwards can be used to mitigate risks associated with both period and cohort effects.

  • The hedging strategy can be derived through variance minimization or Value-at-Risk minimization.  

Description
Description
Related Paper
  • Liu, Y. and Li, J.S.-H., 2018. A strategy for hedging risks associated with period and cohort effects using q-forwards. Insurance: Mathematics and Economics, 78: 267-285.

Related Paper