Stochastic Modeling and Pricing Of Mortality-linked Securities

Open Access
Author:
Li, Boya
Area of Honors:
Mathematics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Zhongyi Yuan, Thesis Supervisor
  • Diane Marie Henderson, Honors Advisor
Keywords:
  • stochastic mortality model
  • the Wang transform
  • mortality-linked securities
  • pure mortality bond
  • maximum likelihood estimation
Abstract:
This paper investigates the application of stochastic mortality model and the Wang transform to mortality-linked securities by incorporating an additional process. The Lin and Cox model, which takes extreme events into consideration, is used to model future mortality rates. The Wang transform leads to the final price of the pure mortality bond. With the help of the statistical software R, we use the maximum likelihood estimation to estimate the values of parameters in the Lin and Cox model and use the Wang transform to evaluate the price of the Swiss Re mortality bond. Also, by using a similar method we find the price of a pure mortality bond, which is designed to resemble the Swiss Re bond. Our result can be used as a reference for companies that issue such bonds.