Volatility v. Trend Risk

(Oct 8, 2010)

The year 1992 was important in the development of forecasting methods: Ronald Lee and Lawrence Carter published their highly influential paper on forecasting US mortality.  The problem is difficult: given matrices of deaths and exposures (rows indexed by age and columns by year) can we forecast future death rates?  Lee and Carter designed a model specifically to solve this problem:

log μx,yαx + βxκy        (1)

where αx measures the average mortality at age xκy measures the effect of year y; this year effect is modulated by an age dependent coefficient, βx.  Lee and Carter used US data up to 1989 and here I've followed them by using data on US males aged 60-90 between 1933-1989,

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Tags: mortality projections, parameter uncertainty, Lee-Carter, drift model

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