Pricing the Extreme Mortality Bonds Based on the Double Exponential Jump Diffusion Model

Shiqing Xie(Department of Finance, School of Economics, Peking University)
Qin Shang(School of Management and Economics, Dalian University of Technology)

Abstract

Extreme mortality bonds (EMBs), which can transfer the extreme mortality risks confronted by life insurance companies into the capital market, refer to the bonds whose nominal values or coupons are associated with mortality index. This paper first provides the expected value of mortality index based on the double exponential jump diffusion (DEJD) model under the risk-neutral measure; then derives the pricing models of the EMBs with principal reimbursement non-cumulative and cumulative threshold respectively; finally simulates the bond prices and conducts a parameter sensitivity analysis. This paper finds that the jump and direction characteristics of mortality index have significant impacts on the accuracy of the EMB pricing.

Keywords

Extreme Mortality Bonds; Reimbursement Mechanisms; Double Exponential Jump Diffusion Distribution; Risk-neutral Pricing

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DOI: http://dx.doi.org/10.26549/jfr.v8i1.18638