Financial Valuation of Mortality Risk via the Instantaneous Sharpe Ratio : Applications to Pricing Pure Endowments Version : 4 November 2005

@inproceedings{Milevsky2005FinancialVO,
title={Financial Valuation of Mortality Risk via the Instantaneous Sharpe Ratio : Applications to Pricing Pure Endowments Version : 4 November 2005},
author={Moshe Arye Milevsky and S. David Promislow},
year={2005}
}

We develop a theory for pricing non-diversifiable mortality risk in an incomplete market. We do this by assuming that the company issuing a mortality-contingent claim requires compensation for this risk in the form of a pre-specified instantaneous Sharpe ratio. We prove that our ensuing valuation formula satisfies a number of desirable properties. For example, we show that it is subadditive in the number of contracts sold. A key result is that if the hazard rate is stochastic, then the risk… CONTINUE READING