Journal of Financial and Quantitative Analysis Vol. 52 No. 5 2017

A Multivariate Model of Strategic Asset Allocation with Longevity Risk

Emilio Bisetti^1,2,3; Carlo A. Favero^1,2,3; Giacomo Nocera¹; Claudio Tebaldi^1,2,3

¹ Audencia Business School · ² Bocconi University · ³ Carnegie Mellon University

Abstract

Population-wide increase in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate that risk. This paper extends the standard Campbell–Viceira (2005) strategic asset allocation model by including a longevity-linked investment possibility. Model estimation, based on prices for standardized annuities publicly offered by U.S. insurance companies, shows that aggregate shocks to survival probabilities are predictors for long-term returns of the longevity-linked securities, and reveals an unexpected predictability pattern. Valuation of longevity risk premium confirms that longevity-linked securities offer inexpensive funding opportunities to asset managers.

DOI

10.1017/s0022109017000692

Volume

52

Issue

5

Pages

2251-2275

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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