Pricing Longevity Bonds Based on Stochastic Mortality Forecasting by Panel Data Procedures

Abstract

In order to hedge the longevity risk, longevity bonds are designed, whose payoff structure depends on the changes in mortality. To forecast the mortality more precisely, we use a time-dynamic stochastic model by utilizing a panel data approach to forecast the mortality rates and get a survival index. Empirical study is conducted with the data in China. Then we apply these forecasting mortality rates to evaluate one kind of longevity bond. It turns out that it is reliable for the social security systems and the life insurance industry.