On the optimal hedge ratio in index-based longevity risk hedging

Jackie Li, Chong It Tan, Sixian Tang, Jia Liu

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In an index-based longevity hedge, the so-called longevity basis risk arises from the potential mismatch between the hedging instrument and the annuity portfolio being hedged, due to the differences in the underlying populations and payoff structures. To reduce the impact of this longevity basis risk and increase the hedge effectiveness, an optimal position in the hedging instrument should be determined appropriately with regard to the nature of the two populations and also the timing of the payments. In this paper, we examine some analytical results on the optimal hedge ratio in hedging the longevity exposure of an annuity portfolio with index-based longevity- or mortality-linked securities. This optimal hedge ratio may serve as a convenient starting point for constructing an index-based hedge. We also conduct a cost–benefit analysis using different financial objectives. Our results are based on data of Australian public sector pensioners.
Original languageEnglish
Pages (from-to)445-461
Number of pages17
JournalEuropean Actuarial Journal
Volume9
Issue number2
Early online date21 Mar 2019
DOIs
Publication statusPublished - 1 Dec 2019

Keywords

  • Index-based longevity hedge
  • Longevity basis risk
  • Longevity swap
  • q-forward
  • S-forward

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