Consistent Dynamic Affine Mortality Model for Longevity Risk Applications

This paper proposes and assesses consistent multi-factor dynamic affine mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves. The framework includes an arbitrage-free model specification. There are multiple risk factors allowing applications to hedging and pricing mortality and longevity bonds, mortality derivatives and more general risk management problems. A state-space representation is used to estimate parameters for the model with the Kalman filter. A 3-factor model specification is shown to provide a good fit to the observed survival curves especially for older ages, and performs better than the 2-factor models. Consistent models are shown to improve model performance and stability.