TY - JOUR
T1 - A comparison of the Lee-Carter model and AR-ARCH model for forecasting mortality rates
AU - Giacometti, Rosella
AU - Bertocchi, Marida
AU - Rachev, Svetlozar T.
AU - Fabozzi, Frank J.
N1 - Funding Information:
The authors greatly acknowledge the national Italian grant from the Ministry of Education and Research: Financial innovations and demographic changes: new products and pricing instruments with respect to the stochastic factor aging (local coordinator M. Bertocchi) and the local grant from the University of Bergamo 2009 (coordinator M. Bertocchi). Svetlozar Rachev gratefully acknowledges support by grants from the Division of Mathematical, Life and Physical Sciences, College of Letter and Science , University of California, Santa Barbara , the Deutschen Forschungsgemeinschaft, and the Deutscher Akademischer Austausch Dienst .
PY - 2012/1
Y1 - 2012/1
N2 - With the decline in the mortality level of populations, national social security systems and insurance companies of most developed countries are reconsidering their mortality tables taking into account the longevity risk. The Lee and Carter model is the first discrete-time stochastic model to consider the increased life expectancy trends in mortality rates and is still broadly used today. In this paper, we propose an alternative to the Lee-Carter model: an AR(1)-ARCH(1) model. More specifically, we compare the performance of these two models with respect to forecasting age-specific mortality in Italy. We fit the two models, with Gaussian and t-student innovations, for the matrix of Italian death rates from 1960 to 2003. We compare the forecast ability of the two approaches in out-of-sample analysis for the period 2004-2006 and find that the AR(1)-ARCH(1) model with t-student innovations provides the best fit among the models studied in this paper.
AB - With the decline in the mortality level of populations, national social security systems and insurance companies of most developed countries are reconsidering their mortality tables taking into account the longevity risk. The Lee and Carter model is the first discrete-time stochastic model to consider the increased life expectancy trends in mortality rates and is still broadly used today. In this paper, we propose an alternative to the Lee-Carter model: an AR(1)-ARCH(1) model. More specifically, we compare the performance of these two models with respect to forecasting age-specific mortality in Italy. We fit the two models, with Gaussian and t-student innovations, for the matrix of Italian death rates from 1960 to 2003. We compare the forecast ability of the two approaches in out-of-sample analysis for the period 2004-2006 and find that the AR(1)-ARCH(1) model with t-student innovations provides the best fit among the models studied in this paper.
KW - AR(1)-ARCH(1) model
KW - Autoregression-autoregressive conditional heteroskedasticity model
KW - Lee-Carter model
KW - Mortality rates
UR - http://www.scopus.com/inward/record.url?scp=80855132478&partnerID=8YFLogxK
U2 - 10.1016/j.insmatheco.2011.10.002
DO - 10.1016/j.insmatheco.2011.10.002
M3 - Article
AN - SCOPUS:80855132478
SN - 0167-6687
VL - 50
SP - 85
EP - 93
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
IS - 1
ER -