The Impact of Longevity Risk on the Term Structure of the Risk-Return Tradeoff

The increase in worldwide life expectancy finds a major drawback in the higher-than-expected liabilities that annuity providers will face in the next few years by paying more retirees for a longer period of time. Longevity-Linked Securities have recently been subject to great interest from academics and practitioners as capable of hedging longevity risk through financial markets. Objective of this paper is the analysis of the long-term risk-return tradeoff and its term structure when an ideal longevity-linked security is added to stocks, bonds and T-Bills investment opportunities and the effect of Longevity Risk on the optimal asset allocation in efficient portfolios.