Duration models - Exercises 3

Exercise 1.
This exercise is about Whittaker-Henderson smoothing procedure of life tables. Consider q̂x =
dx /nx the binomial estimator, and qxl (h) the smoothed curve, which is obtained by minimizing
F (c) + hS(c), where
m
X
F (c) = wx (q̂x − cx )2 ,
x=1
m−z
X
S(c) = (∆z cx )2 .
x=1

The curves q̂, c, q l are identified to columns vectors in Rm .

1. What is the exact distribution of q̂x ? Its asymptotic distribution ?
2. Show that F (c) = (q̂ − c)T W (q̂ − c) for some m × m matrix W.
3. Show that ∆z cx = Kz c, where Kz is a matrix for which you will mention the dimension.
Explicit Kz for z = 2, z = 3.
4. Show that q l = Aq̂, where one will completely determine the matrix A.
5. Recall the role of the smoothing parameter h.

Exercise 2.
We consider a two-dimensional table, that is we are interested in estimating

qx,t = P(x ≤ T < x + 1|U = t),

where T and U are two duration variables.

1. Give examples of applications in which one may be interested in using such a two-
dimensional table.
2. How would you estimate qx,t non parametrically ? Discuss the potential problems coming
from such an estimation.
3. Propose a way to generalize Whittaker-Henderson smoothing to such a table.

Exercise 3.
Let qx = P(x ≤ T < x + 1|T ≥ x). The Heligman-Pollard model consists of assuming that
qx C
= A(x+B) + D exp(−E(log x − log F )2 ) + GH x ,
1 − qx

where (A, B, C, D, E, F, G, H) are positive parameter which need to be estimated. This model
is used mostly in demography to study mortality.
1. Show that f (q) = q/[1 − q], defined on (0, 1), is strictly increasing, taking values into a
set to be determined.
C
2. The first term, A(x+B) , is introduced by Heligman and Pollard to capture infant morta-
lity. Explain why it is a reasonable idea, if one restricts the possible values of A to some
subset of R+ .
3. The second term, D exp(−E(log x − log F )2 ) represents some mortality peak. Explain the
roles of E and F in terms of localization of this peak and in terms of its intensity.
4. What could represent the last term GH x ?
 5. Recall the link between µ(x), mortality rate (or hazard rate) at age x, and qx . Assuming
that µ(x) is constant between x and x+1, show that, for x sufficiently large, x → µ(x) can
be approximated by a linear function, and express the parameters of this linear function
in terms of the parameters of Heligman-Pollard model. (Indication : one could begin by
determining an approximation of f (q) when q is close to 1).
In the following, one focuses on the mortality of policyholders who subscribed the following
contract :
— Minimum age when subscribing : 18.
— Type of contract : 1 year term life insurance, that is if the subscriber dies during the
year, her/his family receives a capital C.
Based on portfolio data, one tries to build a life table for this population.
6. What are the advantages/inconveniences of keeping the infant mortality term into the
model ? (that is not assuming A = 0)
7. One of your colleagues hesitates between using the Heligman-Pollard model and the
Gompertz-Makeham model (µ(x) = a + bcx ). Assuming that they give relatively similar
performances in terms of fit, which one of these two models (Gompertz-Makeham or
Heligman-Pollard) would you use and why ? (Indication : there is no universal answer,
just give your insight based on reasonable arguments)
8. Which kind of techniques could be used to circumvent the inconveniences raised by the
two previous models ?
9. Bonus question : the parameters of the model have been estimated, and used to design
a life table. Would it be smart to use this life table to study the mortality of the same
population but focusing on a pension contract instead of a term insurance contract ?
(pension contract = life annuity that is paid to the subscriber from the day he retires to
her/his death).