Publication date: Available online 20 July 2017
Source:Insurance: Mathematics and Economics
Author(s): Xuemiao Hao, Chunli Liang, Linghua Wei
We model and quantify counterparty credit risk for K-forward, a newly proposed longevity-linked security. We focus on the evaluation of credit value adjustment (CVA) from the longevity risk hedger’s perspective. The modeling involves two folds. First, we use a vector autoregressive integrated moving-average process to model the time series of mortality indexes that is obtained by applying the original Cairns–Blake–Dowd model. Then, the risk-neutral default probability of the hedge provider is obtained by calibrating a reduced-form default model on the market price of bonds issued by the hedge provider. We calculate and compare CVA in K-forwards for different combinations of hedger provider, reference year and recovery rate.
Source:Insurance: Mathematics and Economics
Author(s): Xuemiao Hao, Chunli Liang, Linghua Wei
