SECURITIZATION OF LONGEVITY RISK USING PERCENTILE TRANCHING

초록

Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee-Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk-yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches.

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