Asset Liability Management of Longevity and Interest Rate Risks: Using Survival–Mortality Bonds

A new option for mortality–interest rates

“…In the past decades, all types of mortality-linked securities have been almost customized and traded between agents, rather than standardized and traded in some exchange. Lin et al (2022) proposed to link a standard mortality index to government bonds which can be split into S and M bonds and STRIPS. Since the markets for government bonds have been prosperous, we can expect to trade SM, S, and M issues efficiently in the open market and then a complete term structure for mortality rates can be implied by the market prices of M or S issues, just like that an efficient market for government bonds and their STRIPS contribute to a complete term structure for interest rates.…”

“…Finally, it is worth noting that Lin et al (2022) proposed to strip the SM STRIPS, $$$S{M}_{x,t,k}={c}_{k}\cdot {e}^{-{\sum }_{i=0}^{k-1}{\delta }_{i}},$$$ into an S STRIPS, $$${S}_{x,t,k}={}_{k}p_{x,t}\cdot {c}_{k}\cdot {e}^{-{\sum }_{i=0}^{k-1}{\delta }_{i}},$$$ and an M STRIPS, $$${M}_{x,t,k}=(1-{}_{k}p_{x,t})\cdot {c}_{k}\cdot {e}^{-{\sum }_{i=0}^{k-1}{\delta }_{i}}$$$ with the coupon $${c}_{k}$$ paid at the end of the k th year. Under the structure, the mortality risk premiums for M STRIPS and the longevity risk premiums for S STRIPS can be determined by the market forces at the same time, and the sum of the two risk premiums must be zero.…”

“…which are similar to the put-call parity in finance. Finally, it is worth noting that Lin et al (2022) proposed to strip the SM STRIPS,…”

“…This impedes product standardization and liquidity, which the market is slowly trying to overcome through indexed solutions (Fetiveau & Jia, 2014). Lin et al (2022) proposed to attach a mortality index to a conventional government bond, called survival-mortality (SM) bond, strip the survivalcoupon bond, called survival (S) bond, and the mortality-coupon bond, called mortality (M) bond, and further split it into S, M, and SM zero-coupon STRIPS 1 to construct a complete term structure for mortality rates.…”