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ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Mortality Tables

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Summary

1 INTRODUCTION

3 ESTIMATION

4 PREDICTION

5 POSSIBLE EXTENSIONS

6 APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

1. INTRODUCTION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

• To focus on the demographic aspects of "mortality" and

"longevity", in order to get a sound dynamical statistical model

for mortality prediction, which seems to be an essential

premiminary work, for any project on mortality derivative

pricing.

• To avoid standard drawbacks :

- under or over-parameterization

- possible non positivity of model induced mortality intensity

• To carefully modelize the long term behavior by disentangling

as precisely as possible :

- deterministic longevity effects

- stochastic longevity effects important both in the historical

and the risk neutral world (risk premia)

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

• To provide :

- precision of the estimation of the parameters

- not only point predictions but also distributions of predictions

• To obtain :

- explicit or quasi explicit prediction formulas

- a framework easily extended to a joint modelling of an

historical and a risk-neutral dynamics

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

• key tools :

- affine stochastic processes, in particular the pair (Zt , Zt2 )

when Zt is a gaussian AR(1)

- recursive formulas for multihorizon Laplace transforms of

affine processes

- cross sectional asymptotic estimators of mortality intensities

- extended Kalman filter

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

= exp[−λ(x; t + 1)]

λ(x; t + 1) is the mortality intensity

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

where (Zt ) is a Gaussian autoregressive process :

Zt = ρZt−1 + σεt , (εt ) standard Gaussian

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

i) The survivor function is between 0 and 1, iff

(whereas negative mortality rates are not excluded if the

quadratic term is not introduced)

ii) The trend effects are introduced in a flexible way

a deterministic way, by mean of δat , δbt , δct

a stochastic way, if the factor process features a unit root.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

cases

age effect : ax , when δa = 1,

time effect : δat , when a = 1,

cohort effect : δat−x , when a = 1/δa .

iv) Special case of affine model, based on the affine process

(Zt , Zt2 ), which explains the explicit prediction formulas

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

key idea

S(x; t + h) = P(Y > t + h|Y > t, age at t = x, zt )

= Et P(Y > t + h|Y > t, age at t = x, zt+h ),

= Et Πhu=1 P(Y > t + u|Y > t + u − 1, age at t = x, zt+h )

X

h

= Et exp[− λ(x + u − 1; t + u)]

u=1

2 ) : multihorizon

Since λ(x + u − 1; t + u) linear in (Zt+u , Zt+u

2

Laplace transform of (Zt , Zt )

=⇒ Simple recursive formula

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

3. ESTIMATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Assumption :

The lifetime variables Yi,to ,(individual i of cohort to ), are

independent conditionally to the factor Zt and are driven by the

mortality intensity specified above.

The survivor probability exp[−λ(x, Zt+1 , t + 1)] = π(Zt+1 , t + 1)

is estimated by the observed survivor rates π̂(x, t + 1) and,

conditional on Zt , the π̂(x, t + 1) are asymptotically

independent, gaussian

√ D

nx,t [π̂(x, t+1)−π(x, Zt+1 , t+1)] −→ N[{0, π(x, Zt+1 , t+1)[1−π(x, Zt+1 , t+1)]}

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Delta method

√ D

nxt [λ̂(x, t + 1) − λ(x, Zt+1 , t + 1)] −→ N{0, exp[λ(x, Zt+1 , t + 1)] − 1}

8 1/2

>

> exp[λ(x, Zt+1 ) − 1]

< λ̂(x, t + 1) = λ(x, Zt+1 , t + 1) + ξt+1

nxt

>

>

:

Zt+1 = ρZt+1 + sεt+1

Nonlinear state-space model ⇒ Extented Kalman Filter, for

the estimation of the parameter.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

4. PREDICTION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Two complementary approaches

by simulation

by prospective tables

Simulation

The aim : compute by simulation the residual lifetime

distribution given the information at time t.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

i) Draw a sequence of innovations εst+1 , . . . , εst+n ... in the

standard normal

ii) Deduce a simulated future factor path by :

s s

Zt+n = ρZt+n−1 + σεst+n , n = 1, . . .

with initial condition Zts = Zt

iii) Deduce the simulated spot intensities

λs (x + n − 1, Zt+n

s , t + n)

survivor probabilities exp[−λ(x + n − 1, Zt+ns , t + n)] to get the

provides a good approximation of the distribution of Y at date t.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

It is an analytic approach

i) At date t, given the available information and age x of the

individual, compute

The explicit formula is given Corollary 1.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

S(x; t, t + h)

exp[−λP (x, t, t + h)] =

S(x; t, t + h − 1)

Et {exp(− ∧ (x, t, t + h − 1)) exp[−λ(x + h − 1; t + h)]

=

S(x, t, t + h − 1)

t (or forward mortality rate)

It can be interpreted as an average spot mortality rate after an

appropriate change of measure.

It has to be updated regularly, since the information increases

which time.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

5. POSSIBLE EXTENSIONS

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

• Several factors

• Pricing methodology :

- (Zt , Zt2 ) extended to a linear process Ft = (Xt0 , Zt , Zt2 )

- SDF Mt,t+1 exponential affine in Ft , Ft+1

- RN dynamics also affine

- pricing at t of payoffs at T > t of the following types :

1lYi >T ) (recursive formulas)

or exp(w10 FT )1l(w20 FT <k ) 1l(Yi >T ) (unidimensional integrals)

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

6. APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Data

Data drawn from the Berkeley human mortality database ,

For France,

disaggregated by gender

year 1899-2004

age 0-110 year

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

The intensity increases with age for sufficiently large age and

fixed time

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

λ(x, t) = α1 exp(a1 x+b1 t)+α2 Zt exp(a2 x+b2 t)+α3 Zt2 exp(a3 x+b3 t)

It will provide a good fit for a part of the mortality table

More factors are needed for the whole table

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Indeed,

there is a change of regime after the second world war, which is

easily detected by considering the average mortality intensities

per year

x̄

1 X

λ̄(t) = λ(x; t)

x̄ + 1

x=0

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

Before applying an efficient estimation method, i.e. maximum

likelihood approximated by an Extended Kalman filter, it is

necessary to implement a subefficient, but more robust

estimation approach providing appropriate starting values in the

algorithm.

Especially important due to the difficult identification of the

deterministic versus stochastic time effects.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

By noting that :

T

1X

where λ̄(x) = λ(x, t) is the mortality intensity averaged

T

t=1

by age

α + β exp(ax) is sufficient

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

By a joint optimization :

a,α,β,Ft

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

components

By fitting F̂t to an exponential time trend :

F̂t = γ0 + γ1 exp(γ2 t) + Zt

Provides a residual plot, which is useful to analyse the pure

stochastic factor dynamic.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

An extended Kalman filter, with starting values given by the

previous steps.

Final model :

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

The estimated model can be used to compute the predictions

of λ(x, t) .

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

for different cohorts and gender

Skewed distributions, with the sign of the skewness depending

on the current age

Ordering between male and female

Very appropriate for a quantile analysis of the lifetime

distribution

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

for a cohort agex x (80 in the example) at t (2004 in the

example) (males + females)

S(x, t, t + h)

exp[−λP (x, t, t + h)] =

S(x; t, t + h − 1)

is the prospective (forward) survivor rate at t, between t + h − 1

and t + h

λP (x, t, t + h) : prospective (forward) mortality intensity at t,

between t + h − 1 and t + h.

INTRODUCTION

THE INTENSITY MODEL

ESTIMATION

PREDICTION

POSSIBLE EXTENSIONS

APPLICATION

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