We propose a new model for stochastic mortality. The model is based on the literature on a¢ ne term structure models. It satis…es three important requirements for application in practice: analytical tractibility, clear interpretation of the factors and compatibility with …nancial option pricing models. We test the model …t using data on Dutch mortality rates. Furthermore, we discuss the speci…cation of a market price of mortality risk and apply the model to the pricing of a Guaranteed Annuity Option and the calculation of required Economic Capital for mortality risk.

We propose an approach to find an approximate price of a swaption in affine term structure models. Our approach is based on the derivation of approximate swap rate dynamics in which the volatility of the forward swap rate is itself an affine function of the factors. Hence, we remain in the affine framework and well-known results on transforms and transform inversion can be used to obtain swaption prices in similar fashion to zero bond options (i.e., caplets). The method can easily be generalized to price options on coupon bonds. Computational times compare favorably with other approximation methods. Numerical results on the quality of the approximation are excellent. Our results show that in affine models, analogously to the LIBOR market model, LIBOR and swap rates are driven by approximately the same type of (in this case affine) dynamics.

No abstract

No abstract