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Using hierarchical Archimedean copulas for modelling mortality dependence and pricing mortality-linked securities

Published online by Cambridge University Press:  26 August 2020

Jackie Li ,
Uditha Balasooriya  and
Jia Liu
Jackie Li*
Affiliation:
Actuarial Studies and Business Analytics, Macquarie University, Sydney, New South Wales, 2109, Australia
Uditha Balasooriya
Affiliation:
Actuarial Studies and Business Analytics, Macquarie University, Sydney, New South Wales, 2109, Australia
Jia Liu
Affiliation:
Actuarial Studies and Business Analytics, Macquarie University, Sydney, New South Wales, 2109, Australia
*
*Corresponding author. E-mail: jackie.li@mq.edu.au
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Abstract

In this article, we explore the use of multivariate Archimedean copulas in modelling the mortality dependence between different countries and pricing mortality bonds. We study the fitting performance of multi-dimensional, fully nested, and partially nested Archimedean copulas and test 11 types of generators and two skewed distributions. To evaluate their practical usefulness, we adopt the fitted models to compute the market prices for some typical mortality bond structures. The results show that the copula assumption has a significant impact on the calculation of the prices of mortality-linked securities and the management of extreme mortality risks.

Keywords

Nested Archimedean copulasMortality dependenceMortality bond
Type
Original Research Paper
Information
Annals of Actuarial Science , Volume 15 , Issue 3 , November 2021 , pp. 505 - 518
Copyright
© Institute and Faculty of Actuaries 2020

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