TY - JOUR
T1 - Pricing extreme mortality risk in the wake of the COVID-19 pandemic
AU - Li, Han
AU - Liu, Haibo
AU - Tang, Qihe
AU - Yuan, Zhongyi
N1 - Funding Information:
The authors would like to thank the anonymous referee for his/her very useful comments. This work is supported by the Australian Government through The Australian Research Council Discovery Projects funding scheme ( DP200101859 and DP220100090 ).
Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2023/1
Y1 - 2023/1
N2 - 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.
AB - 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.
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U2 - 10.1016/j.insmatheco.2022.11.002
DO - 10.1016/j.insmatheco.2022.11.002
M3 - Article
C2 - 36415656
AN - SCOPUS:85142325265
SN - 0167-6687
VL - 108
SP - 84
EP - 106
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
ER -