Journal article

A step-by-step guide to building two- population stochastic mortality models

JS-H Li, Rui Zhou, MR Hardy

Insurance: Mathematics and Economics | Elsevier | Published : 2015

Abstract

Two-population stochastic mortality models play a crucial role in the securitization of longevity risk. In particular, they allow us to quantify the population basis risk when longevity hedges are built from broad-based mortality indexes. In this paper, we propose and illustrate a systematic process for constructing a two-population mortality model for a pair of populations. The process encompasses four steps, namely (1) determining the conditions for biological reasonableness, (2) identifying an appropriate base model specification, (3) choosing a suitable time-series process and correlation structure for projecting period and/or cohort effects into the future, and (4) model evaluation. Fo..

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