Price bounds of mortality-linked security in incomplete insurance market |
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| Institution: | 1. Department of Quantitative Finance, National Tsing Hua University, Taiwan;2. Department of Finance, National Central University, Taiwan;3. Risk and Insurance Research Center, College of Commerce, National Chengchi University, Taiwan;4. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taiwan;1. Department of Mathematics, Michigan State University, East Lansing, MI 48824, United States;2. Towers Watson, Hartford office, University of Connecticut, Storrs, CT 06269-3009, United States;3. Department of Mathematics, University of Connecticut, Storrs, CT 06269-3009, United States;1. Division of Cancer Prevention and Control, CDC, Atlanta, Georgia;2. University of California, Santa Cruz, Santa Cruz, California;3. RTI International, Research Triangle Park;4. Department of Obstetrics & Gynecology, Duke University, Durham, North Carolina;1. Department of Finance, Feng Chia University, Taiwan;2. Taiwan Academy of Banking and Finance, Taiwan;3. Department of Money and Banking, National Chengchi University, Taiwan;1. Community Health Research Department, Hospital Infantil de México Federico Gómez, Ministry of Health (SSA) Mexico City, Mexico;2. Center for Social and Economic Studies on Health, Hospital Infantil de México Federico Gómez, Ministry of Health (SSA) Mexico City, Mexico;3. Research Director, Hospital Infantil de México Federico Gómez, Ministry of Health (SSA) Mexico City, Mexico |
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| Abstract: | This study investigates reasonable price bounds for mortality-linked securities when the issuer has only a partial hedging ability. The price bounds are established by minimizing the difference between the benchmark price and the replicating portfolio cost subject to the gain–loss ratio of excess payoff of the mortality-linked securities. In contrast to the previous studies, the assumptions of no-arbitrage pricing and utility-based pricing are not fully employed in this study because of the incompleteness of the insurance securitization market. Instead, a framework including three insurance basis assets is constructed to search for the price bounds of mortality-linked securities and use the Swiss Re mortality catastrophe bond, issued in 2003, as a numerical example. The proposed price bounds are valuable for setting bid–asked spreads and coupon premiums, and establishing trading strategies in the raising mortality securitization markets. |
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| Keywords: | Incomplete market pricing Mortality risk Mortality bond valuation Mortality-linked security |
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