Two Factor Stochastic Mortality Modeling with Generalized Hyperbolic Distribution
Volume 12, Issue 1 (2014), pp. 1–18
Pub. online: 2 August 2021 Type: Research Article Open Access
2 August 2021
2 August 2021
Abstract: In this paper, we reconsider the two-factor stochastic mortality model introduced by Cairns, Blake and Dowd (2006) (CBD). The error terms in the CBD model are assumed to form a two-dimensional random walk. We first use the Doornik and Hansen (2008) multivariate normality test to show that the underlying normality assumption does not hold for the considered data set. Ainou (2011) proposed independent univariate normal inverse Gaussian L´evy processes to model the error terms in the CBD model. We generalize this idea by introducing a possible dependency between the 2-dimensional random variables, using a bivariate Generalized Hyperbolic distribution. We propose four non-Gaussian, fat-tailed distributions: Stu dent’s t, normal inverse Gaussian, hyperbolic and generalized hyperbolic distributions. Our empirical analysis shows some preferences for using the new suggested model, based on Akaike’s information criterion, the Bayesian information criterion and likelihood ratio test, as our in-sample model selec tion criteria, as well as mean absolute percentage error for our out-of-sample projection errors.