INTRODUCTION

THE INTENSITY MODEL

ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Quadratic Stochastic Intensity and Prospective

Mortality Tables

Christian GOURIEROUX, Alain MONFORT

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Summary

1 INTRODUCTION

2 THE INTENSITY MODEL

3 ESTIMATION

4 PREDICTION

5 POSSIBLE EXTENSIONS

6 APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

1. INTRODUCTION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Objectives of the paper

• To focus on the demographic aspects of "mortality" and
"longevity", in order to get a sound dynamical statistical model
for mortality prediction, which seems to be an essential
premiminary work, for any project on mortality derivative
pricing.
• To avoid standard drawbacks :
- under or over-parameterization
- possible non positivity of model induced mortality intensity
• To carefully modelize the long term behavior by disentangling
as precisely as possible :
- deterministic longevity effects
- stochastic longevity effects important both in the historical
and the risk neutral world (risk premia)
Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO
 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

• To provide :
- precision of the estimation of the parameters
- not only point predictions but also distributions of predictions
• To obtain :
- explicit or quasi explicit prediction formulas
- a framework easily extended to a joint modelling of an
historical and a risk-neutral dynamics

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

• key tools :
- affine stochastic processes, in particular the pair (Zt , Zt2 )
when Zt is a gaussian AR(1)
- recursive formulas for multihorizon Laplace transforms of
affine processes
- cross sectional asymptotic estimators of mortality intensities
- extended Kalman filter

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

2. THE INTENSITY MODEL

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Conditional survivor function at date t and age x

P[Y > t + 1|Y > t, age at t = x]

= exp[−λ(x; t + 1)]

where Y is the lifetime variable

λ(x; t + 1) is the mortality intensity

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Basic quadratic intensity model

λ(x, t) = αax δat + βbx δbt Zt + γc x δct Zt2 ,

where (Zt ) is a Gaussian autoregressive process :
Zt = ρZt−1 + σεt , (εt ) standard Gaussian

(a > 0, b > 0, c > 0, δa > 0, δb > 0, δc > 0)

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Nice features of this model

i) The survivor function is between 0 and 1, iff

ac > b2 , δa δc > δb2 , 4αγδa δc ≥ β 2 δb2 .

(whereas negative mortality rates are not excluded if the
quadratic term is not introduced)
ii) The trend effects are introduced in a flexible way
a deterministic way, by mean of δat , δbt , δct
a stochastic way, if the factor process features a unit root.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

iii) The specification includes three types of effects as special

cases
age effect : ax , when δa = 1,
time effect : δat , when a = 1,
cohort effect : δat−x , when a = 1/δa .
iv) Special case of affine model, based on the affine process
(Zt , Zt2 ), which explains the explicit prediction formulas

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

key idea
S(x; t + h) = P(Y > t + h|Y > t, age at t = x, zt )
= Et P(Y > t + h|Y > t, age at t = x, zt+h ),
= Et Πhu=1 P(Y > t + u|Y > t + u − 1, age at t = x, zt+h )
X
h
= Et exp[− λ(x + u − 1; t + u)]
u=1
2 ) : multihorizon
Since λ(x + u − 1; t + u) linear in (Zt+u , Zt+u
2
Laplace transform of (Zt , Zt )
=⇒ Simple recursive formula

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

3. ESTIMATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Assumption :
The lifetime variables Yi,to ,(individual i of cohort to ), are
independent conditionally to the factor Zt and are driven by the
mortality intensity specified above.
The survivor probability exp[−λ(x, Zt+1 , t + 1)] = π(Zt+1 , t + 1)
is estimated by the observed survivor rates π̂(x, t + 1) and,
conditional on Zt , the π̂(x, t + 1) are asymptotically
independent, gaussian

√ D
nx,t [π̂(x, t+1)−π(x, Zt+1 , t+1)] −→ N[{0, π(x, Zt+1 , t+1)[1−π(x, Zt+1 , t+1)]}

(nxt number of individuals of age x alive at t)

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Delta method
√ D
nxt [λ̂(x, t + 1) − λ(x, Zt+1 , t + 1)] −→ N{0, exp[λ(x, Zt+1 , t + 1)] − 1}

Asymptotic state-space model :

8  1/2
>
> exp[λ(x, Zt+1 ) − 1]
< λ̂(x, t + 1) = λ(x, Zt+1 , t + 1) + ξt+1
nxt
>
>
:
Zt+1 = ρZt+1 + sεt+1

ξt+1 , εt+1 independently N(0, 1) distributed

Nonlinear state-space model ⇒ Extented Kalman Filter, for
the estimation of the parameter.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

4. PREDICTION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Prediction of residual lifetime

Two complementary approaches
by simulation
by prospective tables
Simulation
The aim : compute by simulation the residual lifetime
distribution given the information at time t.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

At date t, for a given age x :

i) Draw a sequence of innovations εst+1 , . . . , εst+n ... in the
standard normal
ii) Deduce a simulated future factor path by :

s s
Zt+n = ρZt+n−1 + σεst+n , n = 1, . . .
with initial condition Zts = Zt
iii) Deduce the simulated spot intensities
λs (x + n − 1, Zt+n
s , t + n)

iv) Perform a succession of Bernoulli trials with the simulated

survivor probabilities exp[−λ(x + n − 1, Zt+ns , t + n)] to get the

simulated residual lifetime Y . s

v) Replicate s = 1, . . . , S. The sample distribution of Y 1 , . . . , Y S

provides a good approximation of the distribution of Y at date t.
Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO
 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Prospective Mortality Tables

It is an analytic approach
i) At date t, given the available information and age x of the
individual, compute

S(x; t; t + h) = P[Y > t + h|Y > t, age at t = x, information Zt ]

= Et (exp[−λ(x, t +1)−λ(x +1, t +2)−. . .−. . . λ(x +h−1, t +h)])

The explicit formula is given Corollary 1.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

ii) Then, we can compute λP :

S(x; t, t + h)
exp[−λP (x, t, t + h)] =
S(x; t, t + h − 1)
Et {exp(− ∧ (x, t, t + h − 1)) exp[−λ(x + h − 1; t + h)]
=
S(x, t, t + h − 1)

λP (x; t, t + h) is the prospective mortality rate evaluated at date

t (or forward mortality rate)
It can be interpreted as an average spot mortality rate after an
appropriate change of measure.
It has to be updated regularly, since the information increases
which time.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

5. POSSIBLE EXTENSIONS

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

• Several factors
• Pricing methodology :
- (Zt , Zt2 ) extended to a linear process Ft = (Xt0 , Zt , Zt2 )
- SDF Mt,t+1 exponential affine in Ft , Ft+1
- RN dynamics also affine
- pricing at t of payoffs at T > t of the following types :
1lYi >T ) (recursive formulas)
or exp(w10 FT )1l(w20 FT <k ) 1l(Yi >T ) (unidimensional integrals)

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

6. APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Data
Data drawn from the Berkeley human mortality database ,
For France,
disaggregated by gender
year 1899-2004
age 0-110 year

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

The intensity decreases with time for fixed age

The intensity increases with age for sufficiently large age and
fixed time

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

We consider a 1-factor quadratic intensity model

λ(x, t) = α1 exp(a1 x+b1 t)+α2 Zt exp(a2 x+b2 t)+α3 Zt2 exp(a3 x+b3 t)

where (Zt ) is a zero-mean process

It will provide a good fit for a part of the mortality table

50 ≤ age ≤ 90, 1949 < date < 2004

More factors are needed for the whole table

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Indeed,
there is a change of regime after the second world war, which is
easily detected by considering the average mortality intensities
per year
x̄
1 X
λ̄(t) = λ(x; t)
x̄ + 1
x=0

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

A multistep estimation approach

Before applying an efficient estimation method, i.e. maximum
likelihood approximated by an Extended Kalman filter, it is
necessary to implement a subefficient, but more robust
estimation approach providing appropriate starting values in the
algorithm.
Especially important due to the difficult identification of the
deterministic versus stochastic time effects.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Step 1 : Consistent estimation of parameters a1 , a2 , a3

By noting that :

λ̄(x) = α̃1 exp(a1 x) + α̃2 exp(a2 x) + α̃3 exp(a3 x),

T
1X
where λ̄(x) = λ(x, t) is the mortality intensity averaged
T
t=1
by age

α + β exp(ax) is sufficient

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Step 2 : Global determination of the unconstrained factor

By a joint optimization :

min Σx Σt [λ(x, t) − α − Ft − β exp(ax)Ft2 ]2

a,α,β,Ft

Provides estimated values for the global time effect Ft .

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Step 3 : Disentangling deterministic and stochastic time

components
By fitting F̂t to an exponential time trend :

F̂t = γ0 + γ1 exp(γ2 t) + Zt
Provides a residual plot, which is useful to analyse the pure
stochastic factor dynamic.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

We observe a change of regime around 1982

Step 4 : The complete estimation on period 1982-2004

An extended Kalman filter, with starting values given by the
previous steps.

Final model :

λ(x, t) = α + γ0 + γ1 exp(γ2 t) + Zt + β exp(ax)[γ0 + γ1 exp(γ2 t) + Zt ]2 ,

where (Zt ) is a Gaussian AR(1) process

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Predictions (in 2004) of the future spot mortality intensities

The estimated model can be used to compute the predictions
of λ(x, t) .

x = 50, 60, 70, 80, 90 up to t = 2050

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Distribution of the residual lifetime

for different cohorts and gender
Skewed distributions, with the sign of the skewness depending
on the current age
Ordering between male and female
Very appropriate for a quantile analysis of the lifetime
distribution

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Prospective (forward) mortality tables

for a cohort agex x (80 in the example) at t (2004 in the
example) (males + females)

S(x, t, t + h)
exp[−λP (x, t, t + h)] =
S(x; t, t + h − 1)
is the prospective (forward) survivor rate at t, between t + h − 1
and t + h
λP (x, t, t + h) : prospective (forward) mortality intensity at t,
between t + h − 1 and t + h.

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO

 INTRODUCTION
THE INTENSITY MODEL
ESTIMATION
PREDICTION
POSSIBLE EXTENSIONS
APPLICATION

Christian GOURIEROUX, Alain MONFORT QUADRATIC STOCHASTIC INTENSITY AND PROSPECTIVE MO