Coherent pricing of life settlements under asymmetric information

Nan Zhu, Daniel Bauer

Research output: Contribution to journalArticle

10 Scopus citations

Abstract

Although life settlements are advertised to deliver a profitable investment opportunity with a low correlation to market systematic risk, recent investigations reveal a discrepancy of expected and realized returns. While thus far this discrepancy has been attributed to the (allegedly) poor quality of the underlying life expectancy estimates, we present a different explanation of the seemingly high reported expected returns based on {adverse selection. In particular, we provide a coherent pricing mechanism and pricing formulas in the presence of asymmetric information with respect to the underlying life expectancies. Therefore, our study sheds light on the nature of the "unique risks" within life settlements as recently discussed in the financial press.

Original languageEnglish (US)
Pages (from-to)827-851
Number of pages25
JournalJournal of Risk and Insurance
Volume80
Issue number3
DOIs
StatePublished - Sep 1 2013

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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