Sinister Underlying

December 18, 2007 in economizing, quantifying
Tags: art, derivatives, finance, financial, indices, insurance, markets, mortality, trading

The business week started with a jolly piece of news (pointed out by Alea):

“The Goldman Sachs Group, Inc. (NYSE: GS) today announced that it has launched the first index that will allow market participants to measure, manage, and trade exposure to longevity and mortality risks in a standardized, transparent, and real-time manner. Longevity and mortality are the risks that realized lifespan differs from expected lifespan, creating an economic consequence, often a price change in an asset or liability. Holders of mortality risk — typically institutions such as insurance carriers and reinsurers — are economically exposed to a decrease in lifespan, while holders of longevity risks — pension funds, annuity writers, the social security trust fund or life settlement investors — are exposed to an increase. QxX.LS, the first in an expected series of indices, will be a representative sample of the US senior insured population over the age of 65. The initial index will reference a pool of 46,290 de-identified lives.” (from “Goldman Sachs Launches Tradeable Index for Longevity and Mortality”, Business Wire, December 14 2007)

This sounds like a neat response to interesting promises of sophisticated business in the longevity market. The index, of course, is to be traded:

“Hedge funds, banks and asset managers with existing positions in the cash longevity market, or those with an interest in gaining synthetic exposure to this uncorrelated risk class, will be able to use the index to either hedge existing exposure or to initiate investments. “We are excited about bringing this unique product to the market and believe that it will quickly establish itself as the market benchmark. This will result in more transparent pricing of longevity risk, should reduce transaction friction, and will likely lead to improved economics for market participants,“ said Alex Dubitsky, head of Goldman Sachs’ Longevity Markets Group.” (from “Goldman Sachs Launches Tradeable Index for Longevity and Mortality”, Business Wire, December 14 2007)

In order to be entirely convincing, however, this index should consider more fine-grained analysis of longevity (mortality) quantitative nuances. For instance, it could take into account meaningful economic data such as suicide rates, which may indicate mature despondency and subsequent disqualification of realized lifespan. Financial engineers at Goldman Sachs could perhaps correlate the Despondency Index — an economic indicator which takes the moving average of the suicide rate off the Golden Gate Bridge and indexes it to the Dow Jones Industrial Average (developed by Natalie Jeremijenko for the Bureau of Inverse Technology).