Lee-Carter Goes Risk-Neutral

19 Pages Posted: 16 Nov 2005 Last revised: 2 Jan 2008

See all articles by Enrico Biffis

Enrico Biffis

Imperial College Business School

Michel Denuit

Catholic University of Louvain

Date Written: June 26, 2006

Abstract

We consider a class of stochastic intensities of mortality that generalizes the model proposed by Lee and Carter (1992), allowing general diffusions to drive the mortality time-trend. We analyze the stability of such class of intensities under measure changes and show how a risk-neutral version of the generalized Lee-Carter model can be employed for fair valuation purposes. We provide an example of model calibration based on the Italian annuity market.

Keywords: stochastic mortality, Lee-Carter model, mortality projections, fair valuation, longevity risk

Suggested Citation

Biffis, Enrico and Denuit, Michel, Lee-Carter Goes Risk-Neutral (June 26, 2006). Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=848304 or http://dx.doi.org/10.2139/ssrn.848304

Enrico Biffis (Contact Author)

Imperial College Business School ( email )

Imperial College London
South Kensington campus
London, SW7 2AZ
United Kingdom

Michel Denuit

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium