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MODELLING MORTALITY DEPENDENCE WITH REGIME-SWITCHING COPULAS

Published online by Cambridge University Press:  24 April 2019

Rui Zhou
Rui Zhou*
Affiliation:
Department of EconomicsUniversity of MelbourneParkville VIC 3010, Australia E-mail: rui.zhou@unimelb.edu.au
*
E-mail: rui.zhou@unimelb.edu.au
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Abstract

We propose a two-regime Markov switching copula to depict the evolution of mortality dependence. One regime represents periods of high dependence and the other regime represents periods of low dependence. Each regime features a regular vine (R-vine) copula that, built on bivariate copulas, provides great flexibility for modelling complex high-dimensional dependence. Our estimated model indicates that the years of recovery from extreme mortality deterioration and the years of health care reform more likely fall into the low regime, while the years in which extreme mortality deteriorating events break out and the peaceful years without major mortality-impacting events more likely fall into the high regime. We use a case study to illustrate how the regime-switching copula can be applied to assess the effectiveness of longevity risk hedge with different beliefs about future mortality dependence evolution incorporated.

Keywords

Mortality dependenceR-vine copularegime-switchinglongevity riskS-forward.
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 49 , Issue 2 , May 2019 , pp. 373 - 407
Copyright
Copyright © Astin Bulletin 2019 

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