Journal article

A cautionary note on pricing longevity index swaps

R Zhou, JSH Li

Scandinavian Actuarial Journal | Published : 2013

Abstract

In December 2007, Goldman Sachs launched a product called QxX index swap, which is designed to allow market participants to hedge or gain exposure to longevity and mortality risks. In this paper, we offer a quantitative analysis of this brand new financial innovation. First of all, we set up a risk-neutral framework to price QxX index swaps. This framework, which is based on the dynamics of death rates under a two-factor stochastic mortality model in a risk-adjusted probability measure, yields prices (spreads) that are fairly close to the spreads that Goldman Sachs currently offers. We then explore the uncertainty involved in this model-based pricing framework. Specifically, we study paramet..

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