A Multivariate Model of Strategic Asset Allocation with Longevity Risk

Emilio Bisetti , Carlo A. Favero , Giacomo Nocera (1) , Claudio Tebaldi

1 Audencia Business School

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.

Domains: Humanities and Social Sciences; Business administration

Emilio Bisetti, Carlo A. Favero, Giacomo Nocera, Claudio Tebaldi. A Multivariate Model of Strategic Asset Allocation with Longevity Risk. Journal of Financial and Quantitative Analysis, 2017, 52 (05), pp.2251 - 2275. ⟨10.1017/S0022109017000692⟩. ⟨hal-01633544⟩