Pricing extreme mortality risk in the wake of the COVID-19 pandemic

Han Li, Haibo Liu, Qihe Tang, Zhongyi Yuan

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

In pricing extreme mortality risk, it is commonly assumed that interest rate and mortality rate are independent. However, the COVID-19 pandemic calls this assumption into question. In this paper, we employ a bivariate affine jump-diffusion model to describe the joint dynamics of interest rate and excess mortality, allowing for both correlated diffusions and joint jumps. Utilizing the latest U.S. mortality and interest rate data, we find a significant negative correlation between interest rate and excess mortality, and a much higher jump intensity when the pandemic experience is considered. Moreover, we construct a risk-neutral pricing measure that accounts for both diffusion and jump risk premia, and we solve for the market prices of risk based on mortality bond prices. Our results show that the pandemic experience can drastically change investors' perception of the mortality risk market in the post-pandemic era.

Original languageEnglish
Pages (from-to)84-106
Number of pages23
JournalInsurance: Mathematics and Economics
Volume108
DOIs
Publication statusPublished - Jan 2023
Externally publishedYes

Keywords

  • Affine jump-diffusion model
  • COVID-19
  • Implied market price of risk
  • Instantaneous correlation
  • Mortality-linked security
  • Pricing

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