by Elisa Luciano, Antonella Tolomeo; CeRP WP 160/16
The development of a market for longevity bonds is considered benecial to investors, because it offers diversification opportunities. However, understanding of both longevity and interest rate risks is required to rationally invest in longevity bonds. This paper models the optimal behavior of an investor facing the choice between a traditional and a longevity bond. When buying longevity bonds, he can decide to pay a fee and separate the information on different risks affecting its bond value, or to remain uninformed and receive a non-separating signal. The uninformed investor optimally filters his pooled signal. The paper provides conditions under which the optimal portfolio choice is the longevity bond and conditions under which diversication is not beneficial. A calibrated example is provided.
Published: April 2016