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#5018. Optimal dynamic longevity hedge with basis risk

July 2026	publication date
Proposal available till	24-05-2025
4 total number of authors per manuscript	0 $

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Journal’s subject area:

Modeling and Simulation; Management Science and Operations Research; Industrial and Manufacturing Engineering; Computer Science (all); Information Systems and Management;

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Abstract:
This paper proposes an optimal dynamic strategy for hedging longevity risk in a discrete-time setting. Our proposed hedging strategy relies on standardized mortality-linked securities and minimizes the variance of the hedging error as induced by the population basis risk. Under these specifications, we show that the resulting hedging problem can be formulated as a stochastic optimal control framework and that a semi-analytic solution can be derived through an extended Bellman equation. We benchmark our strategy against the “delta” hedging strategy as well as its robustness to q-forwards maturity, reference age, interest rate, and stochastic mortality models. The proposed strategy has many appealing features, including its discrete-time setting which is consistent with market practice and hence conducive to practical implementation, and its generality in that the underlying hedging principle can be applied to other standardized mortality-linked securities and other stochastic models.
Keywords:
Dynamic programming; Longevity risk; Pension liability management; Risk management; Variance minimization

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