Canonical correlation

(Jul 28, 2012)

At our seminar earlier this year I looked at the validity of assumptions underpinning some stochastic projection models for mortality.  I looked at the assumption of parameter independence in forecasting, and examined whether this assumption was borne out by the data.  It transpires that the assumption of independence is a workable assumption for some models, but not for others.  This has important consequences in a Solvency II context - an internal model must be shown to have assumptions grounded in fact.

To illustrate, we contrast two models which share a number of features. First, the Lee-Carter model:

Lee-Carter model

and second the age-period-cohort (APC) model:

Age-Period-Cohort model

Forecasting in these models depends on an assumptionů

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Tags: mortality projections, canonical correlation, cohort effect, Solvency II

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