Mathematical Models for Longevity Risk Management

Aalto University, P.O. Box 11000, FI-00076 Aalto www.aalto.fi Author Helena Aro Name of the doctoral dissertation Mathematical Models for Longevity Risk Management Publisher School of Science Unit Department of Mathematics and Systems Analysis Series Aalto University publication series DOCTORAL DISSERTATIONS 120/2013 Field of research Mathematics Manuscript submitted 12 April 2013 Date of the defence 30 August 2013 Permission to publish granted (date) 30 May 2013 Language English Monograph Article dissertation (summary + original articles) Abstract This thesis presents mathematical models for longevity risk management. An overall objective is to develop methods for hedging the cash flows of longevity-linked liabilities on financial markets. This is obtained by modelling the law of a multivariate stochastic process describing mortality and asset returns, with particular emphasis on the long-term development of mortality and its connections with asset returns. The resulting stochastic model is then applied to study the roles of systematic and non-systematic risks in pension portfolios and, ultimately, to investigate optimal investment from the viewpoint of an investor with longevitylinked liabilities. We show how the hedge of a longevity-linked cash flow can be improved by taking the liabilities into account in investment decisions.This thesis presents mathematical models for longevity risk management. An overall objective is to develop methods for hedging the cash flows of longevity-linked liabilities on financial markets. This is obtained by modelling the law of a multivariate stochastic process describing mortality and asset returns, with particular emphasis on the long-term development of mortality and its connections with asset returns. The resulting stochastic model is then applied to study the roles of systematic and non-systematic risks in pension portfolios and, ultimately, to investigate optimal investment from the viewpoint of an investor with longevitylinked liabilities. We show how the hedge of a longevity-linked cash flow can be improved by taking the liabilities into account in investment decisions.