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Research Papers

Identifying Structural Breaks in Stochastic Mortality Models

[+] Author and Article Information
Colin O’Hare

Department of Econometrics and Business Statistics, Monash University, Melbourne, Victoria 3800, Australiae-mail: colin.ohare@monash.edu

Youwei Li

School of Management, Queen’s University of Belfast, Belfast BT9 5EE, UKe-mail: y.li@qub.ac.uk

Manuscript received April 30, 2014; final manuscript received January 15, 2015; published online April 20, 2015. Assoc. Editor: Athanasios Pantelous.

ASME J. Risk Uncertainty Part B 1(2), 021001 (Apr 20, 2015) (14 pages) Paper No: RISK-14-1020; doi: 10.1115/1.4029740 History: Received April 30, 2014; Accepted February 05, 2015; Online April 20, 2015

In recent years, the issue of life expectancy has become of utmost importance to pension providers, insurance companies, and government bodies in the developed world. Significant and consistent improvements in mortality rates and hence life expectancy have led to unprecedented increases in the cost of providing for older ages. This has resulted in an explosion of stochastic mortality models forecasting trends in mortality data to anticipate future life expectancy and hence quantify the costs of providing for future aging populations. Many stochastic models of mortality rates identify linear trends in mortality rates by time, age, and cohort and forecast these trends into the future by using standard statistical methods. These approaches rely on the assumption that structural breaks in the trend do not exist or do not have a significant impact on the mortality forecasts. Recent literature has started to question this assumption. In this paper, we carry out a comprehensive investigation of the presence or of structural breaks in a selection of leading mortality models. We find that structural breaks are present in the majority of cases. In particular, we find that allowing for structural break, where present, improves the forecast result significantly.

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Figures

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Fig. 1

Plots of the κt factor for the (a) Lee–Carter model, (b) CBD model, (c) Plat model, and (d) O’Hare and Li model for United States, United Kingdom, Australia, and The Netherlands

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Fig. 2

Cumulative sum of residuals test for the Lee–Carter model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia with boundaries

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Fig. 3

Cumulative sum of residuals test for the CBD model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia with boundaries

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Fig. 4

Cumulative sum of residuals test for the Plat model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia with boundaries

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Fig. 5

Cumulative sum of residuals test for the O’Hare and Li model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia with boundaries

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Fig. 6

Test of the structural break for the Lee–Carter model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia

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Fig. 7

Test of the structural break for the CBD model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia

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Fig. 8

Test of the structural break for the Plat model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia

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Fig. 9

Test of the structural break for the O’Hare and Li model for (from top-left clockwise) United States, United Kingdom, The Netherlands, and Australia

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Fig. 10

Forecasts of mortality rates for a 20 year-old for the Lee–Carter model with and without allowance for the structural break for (from top-left clockwise) Australia, United Kingdom, United States, and The Netherlands

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Fig. 11

Forecasts of mortality rates for a 40 year-old for the Lee–Carter model with and without allowance for the structural break for (from top-left clockwise) Australia, United Kingdom, United States, and The Netherlands

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Fig. 12

Forecasts of mortality rates for a 60 year-old for the Lee–Carter model with and without allowance for the structural break for (from top left clockwise) Australia, United Kingdom, United States, and The Netherlands

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Fig. 13

Forecasts of mortality rates for an 80 year-old for the Lee–Carter model with and without allowance for the structural break for (from top-left clockwise) Australia, United Kingdom, United States, and The Netherlands

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