Cepar

You are here

Working Papers

2019Dec
Data analysis

Phitawat Poonpolkul

Abstract:People in different age groups have shown to differ in their degrees of risk aversion. This study investigates the macroeconomic implications of population aging when households are assumed to be increasingly risk-averse in future utility when they age. The model incorporates risk-sensitive preferences used by Hansen & Sargent (1995), which are the only recursive preferences that can separate risk aversion and intertemporal elasticity of substitution while being monotonic, into a 16-generation discrete-time OLG model with undiversifiable income risk. Compared to a time-additive counterpart, risk-sensitive preferences capture precautionary saving motives that exacerbate adverse response of aggregate macroeconomic variables under a population aging scenario through demographic re-weighting and life-cycle distribution channels. Varying risk aversion also allows households to internalize future uncertainties when evaluating their welfare impacts of demographic change, resulting in non-monochromatic welfare dynamics with higher welfare loss under a high-risk environment and vice versa. Risk-sensitive preferences with age-dependent risk aversion can play an important role in optimal policy settings by introducing uncertainties into the welfare impact, analysis, while taking into account more realistic risk-taking behaviour of different age cohorts.

Keywords: Demographic change, risk-sensitive preferences, overlapping-generation model, precautionary savings, risk aversion

2019Nov
china

Qian Lu, Katja Hanewald and Xiaojun Wang

Abstract: China has experienced large improvements in mortality rates, but there remain substantial variations at the provincial level. This paper develops new models to project mortality at both the national and provincial levels in China. We propose two models in a Bayesian hierarchical framework based on principal components and a random walk process, and compile a new comprehensive database containing mortality data for 31 provinces over the period 1982–2010. The baseline two-level model with a national–province hierarchy allows for information pooling across provinces, common national factors and consistency conditions. The extended three-level model with a national–region–province hierarchy pools information in the region and also allows for common factors within the region. Both models provide good estimates and reasonable forecasts for China and its provinces. The baseline two-level model provides good fit and reasonable forecasts with equal width intervals for the provinces. The three-level model has a better fit with a lower deviance information criterion and provides forecast intervals reflecting regional uncertainty. The sensitivity analyses show that the forecasts are robust when changing the trend assumptions and regional groups.

Keywords: Mortality modelling, Bayesian framework, Hierarchical models, Coherent mortality projection, China

2019Nov

Dandan Yu and Denzil G. Fiebig

Abstract: The present study examines the reciprocal relationship between Internet use and cognitive function over time among middle-aged and older populations in China. We use data from the first three waves of the China Health and Retirement Longitudinal Study (CHARLS), where participants provided information on Internet use and cognitive function measures at the baseline in 2011 as well as two follow-ups in 2013 and 2015. Cross-lagged panel models were fitted to test the reciprocal association over these four years. Middle-aged and older individuals with higher cognitive function were more likely to be regular Internet users. After controlling for the effects of cognition two years prior, Internet users tended to score higher on cognitive tests than non-users. These findings survived across alternative subsamples and model specifications. Our results suggest that cognitive decline in later life may explain the lower technology adoption rate among older individuals. Meanwhile, Internet use could serve as a protective factor against cognitive decline in mid-life and older adulthood.

Keywords: Internet use; cognitive function; cross-lagged panel; China

2019Oct
Elderly couple enjoying life

Sisi Yang and Katja Hanewald

Abstract: The Chinese government has launched a series of health reforms to establish universal health insurance coverage, particularly for vulnerable groups, including older adults. However, the current public health insurance system is highly fragmented, consisting of different programs with different levels of premiums and benefits. We analyse whether the universal health insurance system increases the life satisfaction of middle-aged and older Chinese people and to what extent the type of health insurance affects the life satisfaction of this group. Our study is based on data from the China Health and Retirement Longitudinal Study, a nationally representative longitudinal survey of Chinese aged 45 and above, in 2011, 2013, and 2015. We find that the life satisfaction of middle-aged and older adults does not depend on having any health insurance coverage but varies with the type of health insurance coverage, controlling for potential confounding variables such as health status, occupation, hukou status, education, and other demographic variables. Individuals covered by the most generous program, the Government Medical Insurance, reported a higher life satisfaction. In comparison, individuals covered by the Urban Employee Medical Insurance, the Urban Resident Medical Insurance, and the New Rural Cooperative Scheme reported a lower life satisfaction by 0.155, 0.106, and 0.112 standard deviations, respectively. Our results suggest that establishing a more equitable health insurance system should be the next step in health reforms in China.

Keywords: Life satisfaction, Health insurance, Older adults, Health, China

2019Oct
Elderly couple enjoying life

Kevin Krahe, Michael Sherris, Andrés M. Villegas and Jonathan Ziveyi

Abstract: We develop and assess a value-based longevity index that closely tracks the value of longevity-linked liabilities with the potential to signicantly lower the costs and improve the efficiency of index-based longevity hedging techniques relative to standard mortality rate indices, currently referenced in financial markets. As the US is one of the largest countries in terms of market potential for such an index, we use US economic and population data to demonstrate that hedging with our proposed index generates a material reduction in basis risk relative to indices based purely on mortality rates. This is aided by the use of a multi-population continuous-time affine mortality model and a dynamic Nelson-Siegel model for interest rates. We allow both interest rate and ination risks to impact the value of longevity-linked liabilities in our longevity risk hedging. We also bridge the gap between continuous-time and discrete-time multi-population mortality models and show that the continuous-time models are as effective in hedging liabilities as the often used discrete-time models, while being more familiar to nancial market participants.

Keywords: Value-based longevity index, longevity risk, interest rate risk, inflation risk, longevity basis risk, longevity hedging

2019Sep
Michael Sherris

Zhiping Huang, Michael Sherris, Andrés M Villegas and Jonathan Ziveyi

Abstract: This paper assesses and compares multi-factor continuous time ane mortality models applied to age-cohort mortality curves that are well suited for theoretical and practical application in nance and insurance. Models based on Gaussian distributed mortality rates, as well as the Cox-Ingersoll-Ross (CIR) process allowing for Gamma distributed mortality rates, are compared, also quantifying the probability of negative rates in the Gaussian models. In particular, we introduce the Gaussian Arbitrage-Free Nelson-Siegel (AFNS) mortality model incorporating level, slope and curvature factors. The models have appealing features including ecient estimation and computation. We estimate models using age-cohort data to capture cohort eects more eectively and in order to explain the variability in cohort mortality curves in the continuous time framework. The models allow for Poisson variation in the model estimation using the Kalman lter. The ane mortality models facilitate the derivation of closed-form survivor curves allowing for ecient valuation of mortality-linked claims. The models can also incorporate factor dependence allowing for age-dependence in the mortality curves. Importantly we show that the Gaussian independent factor AFNS model performs very well in explaining and forecasting cohort mortality.

Keywords: mortality models, continuous time, cohort curve, affine rates, Kalman filter

2019Sep
media 2019

Shuanglan Li, Héloïse Labit Hardy, Michael Sherris, Andrés M. Villegas

Abstract: Pooled annuity products, where the participants share systematic and idiosyncratic mortality risks as well as investment returns and risk, provide an attractive and effective alternative to traditional guaranteed life annuity products. While longevity risk sharing in pooled annuities has received recent attention, incorporating investment risk beyond fixed interest returns is relatively unexplored. Incorporating equity investments has the potential to increase expected annuity payments at the expense of higher variability. We propose and assess a strategy for incorporating equity investments along with managed-volatility for pooled annuity funds. We show how the managed volatility strategy improves investment performance, while reducing pooled annuity income volatility and downside risk, as well as an investment strategy that reduces exposure to investment risk over time. We quantify the impact of pool size when equity investments are included, showing how these products are viable with relatively small pool sizes.

Keywords: pooled annuity, equity investment, managed volatility, longevity risk 

2019Aug

Michael Sherris and Pengyu Wei

Abstract: This paper proposes a multi-state model of both functional disability and health status in the presence of systematic trend and uncertainty. We classify each individual observation along two dimensions: health status (other than disability) and disability and use the multi-state latent factor intensity (MLFI) model to estimate the transitions rates. The model is then used to calculate (healthy) life expectancy and price a variety of insurance products. We illustrate the importance of various factors and quantify the potential losses from model misspecification. Our results suggest that insurers should pay great attention to health status, trend, and systematic uncertainty in disability/mortality modeling and insurance pricing. We also find that integrating LTC insurance with life annuity can help to reduce the systematic uncertainties.

Keywords: functional disability; health status; trend; systematic uncertainty

2019Aug
Migration

Rafal Chomik and John Piggott

Demographic and technological changes are two megatrends set to transform labour markets around the world. These shifts are already under way and are expected to accelerate, particularly in East and South East Asia, which is home to the world’s oldest and fastest ageing societies and a region with an enviable pace of economic development.
The literature on the nature and impacts of each trend is vast, but the study of the interactions between them is often incidental and rarely in the Asian setting. Yet demography, technology, structural change and economic development are all related. Rapid economic development seen in many parts of Asia is the product of beneficial demographic trends as well as technological catch-up to the production productivity frontier. And technological advancements in medicine have precipitated the increasing levels of life expectancy seen around the world. While more years in good health raise prospects of working for longer, technological and structural change risk leaving older cohorts behind.

Keywords: Asia, labour market, population ageing, technology advances