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1 results

  • DYNAMIC HEDGING OF LONGEVITY RISK: THE EFFECT OF TRADING FREQUENCY

  • Hong Li
  • Journal:
    ASTIN Bulletin: The Journal of the IAA / Volume 48 / Issue 1 / January 2018
    Published online by Cambridge University Press:
    31 August 2017, pp. 197-232
    Print publication:
    January 2018

  • This paper investigates dynamic hedging strategies for pension and annuity liabilities that are exposed to longevity risk. In particular, we consider a hedger who wishes to minimize the variance of her hedging error using index-based longevity-linked derivatives. To cope with the fact that liquidity of longevity-linked derivatives is still limited, we consider a liquidity constrained case where the hedger can only trade longevity-linked derivatives at a frequency lower than other assets. Time-consistent, closed-form solutions of optimal hedging strategies are obtained under a forward mortality framework. In the numerical illustration, we show that lowering the trading of the longevity-linked derivatives to a 2-year frequency only leads to a slight loss of the hedging performance. Moreover, even when the longevity-linked derivatives are traded at a very low (5-year) frequency, dynamic hedging strategies still significantly outperform the static one.