A multivariate model of strategic asset allocation with longevity risk

  • Carlo Favero Carlo Favero
  • Claudio Tebaldi Claudio Tebaldi
  • Emilio Bisetti Emilio Bisetti
  • Giacomo Nocera Giacomo Nocera

Generalized unexpected raise in life expectancy is a source of aggregate risk. Longevity‐linked securities are a natural instrument to reallocate these risks by making them tradable in the
financial market. This paper extends the Campbell and Viceira (2005) strategic asset allocation model including a longevity‐linked investment possibility in addition to equity and fixed income securities. Estimation of the model, based on prices for standardized annuities publicly offered by US insurance companies, shows that aggregate shocks to survival probabilities are predictors for long term returns of the longevity linked securities, and reveals
an unexpected predictability pattern. The empirical valuation of the market price of longevity risk confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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