Statistical emulators for pricing and hedging longevity risk products
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Abstract: We propose the use of statistical emulators for the purpose of valuing mortality-linked contracts in stochastic mortality models. Such models typically require (nested) evaluation of expected values of nonlinear functionals of multi-dimensional stochastic processes. Except in the simplest cases, no closed-form expressions are available, necessitating numerical approximation. Rather than building ad hoc analytic approximations, we advocate the use of modern statistical tools from machine learning to generate a flexible, non-parametric surrogate for the true mappings. This method allows performance guarantees regarding approximation accuracy and removes the need for nested simulation. We illustrate our approach with case studies involving (i) a Lee-Carter model with mortality shocks, (ii) index-based static hedging with longevity basis risk; (iii) a Cairns-Blake-Dowd stochastic survival probability model.
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Cited in
(9)- A machine learning approach to adaptive robust utility maximization and hedging
- Sequential design and spatial modeling for portfolio tail risk measurement
- Machine learning with kernels for portfolio valuation and risk management
- Using bootstrapping to incorporate model error for risk-neutral pricing of longevity risk
- Pricing longevity risk with the parametric bootstrap: a maximum entropy approach
- Sensitivity analysis with ^2-divergences
- A nonparametric sequential learning procedure for estimating the pure premium
- Deep learning for limit order books
- An empirical comparison of some experimental designs for the valuation of large variable annuity portfolios
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