Modeling Multi-Country Longevity Risk with Mortality Dependence : A Lévy Subordinated Hierarchical Archimedean Copulas (LSHAC) Approach

This paper proposes a new copula model known as the Lévy subordinated hierarchical Archimedean copulas (LSHAC) for multi-country mortality dependence modeling. To the best of our knowledge, this is the first paper to apply the LSHAC model to mortality studies. Through an extensive empirical analysis on modelling mortality experiences of 13 countries, we demonstrate that the LSHAC model, which has the advantage of capturing the geographical structure of mortality data, yields better fit, comparing to the elliptical copulas. In addition, the proposed LSHAC model generates out-of-sample forecasts with smaller standard deviations, when compared to other benchmark copula models. The LSHAC model also confirms that there is an association between geographical locations and dependence of the overall mortality improvement. These results yield new insights into future longevity risk management. Finally, the model is used to price a hypothetical survival index swap written on a weighted mortality index. The results highlight the importance of dependence modeling in managing longevity risk and reducing population basis risk