DP10595 A Multivariate Model of Strategic Asset Allocation with Longevity Risk

Author(s): Emilio Bisetti, Carlo A. Favero, Giacomo Nocera, Claudio Tebaldi
Publication Date: May 2015
Keyword(s): longevity risk, strategic asset allocation
JEL(s): G11, G12, G22
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10595

Generalized unexpected raise in life expectancy is a source of aggregate risk. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the Campbell and Viceira (2005) strategic asset allocation model including a longevity-linked investment possibility in addition to equity and fixed income securities. Estimation of the model, based on prices for standardized annuities publicly offered by US 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. The empirical valuation of the market price of longevity risk confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.