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

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 pr..