On bilateral counterparty credit risk in longevity-linked security
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Date
2017
Authors
Wei, Linghua
Journal Title
Journal ISSN
Volume Title
Publisher
Insurance: Mathematics and Economics
Abstract
In recent decades, longevity risk has become a common risk in life insurance
industry. Longevity-linked securities are created to hedge such risk and traded
over the counter. This thesis mainly focuses on evaluating the counterparty credit
risk of longevity securities, using the newly proposed K-forward for example. Instead
of only considering the counterparty credit risk from the hedger’s perspective,
we adopt bilateral credit value adjustment to evaluate the counterparty credit
risk. The modelling consists of two significant parts. The first one is risk exposure
estimated by locally linear Cairns–Blake–Dowd mortality model. The second
part is joint default probability. We use a reduced-form default model to obtain
the marginal risk-neutral term structure of default probability for the hedger and
the hedge provider, and then employ the one-factor Gauss copula to describe the
default correlation between the two parties. This work provides a framework to
measure bilateral counterparty credit risk of longevity-linked securities.
Description
Keywords
BCVA, K-forward, LLCBD model, Longevity risk, Nelson-Siegel yield rate function, One-factor Gauss copula
Citation
Hao, X., Liang, C., & Wei, L. (2017). Evaluation of credit value adjustment in K-forward. Insurance: Mathematics and Economics, 76, 95-103.