A Multivariate Model of Strategic Asset Allocation with Longevity Risk
Многомерная модель стратегического распределения активов с учетом риска долголетия
2017-10-01
SCID: 54.1/tmfyxua9
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Campbell–Viceira modellongevity risklongevity-linked securitiesstrategic asset allocationsurvival probability shocks
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Abstract (AI)
Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate that risk. This paper extends the standard Campbell–Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by U.S. insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.
Key Findings
1
The estimation reveals an unexpected pattern in the predictability of longevity-linked security returns.
2
The paper extends the Campbell–Viceira strategic asset allocation framework by incorporating investment in longevity-linked securities.
3
The study treats increasing population-wide life expectancy as aggregate risk that can be reallocated through longevity-linked instruments.
4
Using U.S. standardized annuity prices, the model finds that aggregate survival-probability shocks predict long-term returns on longevity-linked securities.
5
Valuation results indicate that longevity-linked securities provide inexpensive funding opportunities for asset managers.
Research Object
Longevity-linked securities within a strategic asset allocation model
Research Subject
The effects of aggregate survival-probability shocks on long-term returns and the valuation of longevity risk premiums
Publication Details
Publication Date
2017-10-01
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