Carlo Ambrogio Favero

Carlo Favero holds a D.Phil. from Oxford University, where he was a member of the Oxford Econometrics Research Centre. He currently holds the Deutsch Bank Chair in Asset Pricing and Quantitative Finance at the Department of Finance at Bocconi University.  He has published in scholarly journals on the econometric modelling of bond and stock prices, applied econometrics, monetary policy and  time-series models for macroeconomics and finance.  He is a research fellow of CEPR in the International Macroeconomics programme. He is president of the Innocenzo Gasparini Institute for the Economic Research at Bocconi University and a member of the scientific committee of the Centro Interuniversitario Italiano di Econometria (CIDE). He has been advisor to the Italian Ministry of Treasury for the construction of an econometric model of the Italian economy. He has been consulting the European Commission, the World Bank and the European Central Bank, and the IMF on monetary policy and the monetary transmission mechanism and bond markets. He is member of the editorial board of the Bocconi Springer Series in Mathematics, Statistics, Finance and Economics.

The Economic Consequences of Longevity

Longevity has important economic implications as it is the source of a new risk: the risk that agents outlive their savings. Longevity risk can be decomposed in two underlying components: random variation risk and trend risk. Random variation risk is the risk that individual mortality rates differ from the outcome expected as a result of chance -- some people will die before their life expectancy, some will die after. Trend risk is the risk that unanticipated changes in life-style behavior or medical advances significantly improve longevity. Trend risk, similarly to any macroeconomic risk, is on the other hand an "aggregate risk" that cannot be diversified away by pooling and is therefore the more relevant for its economic consequences.

State pension systems are by their nature espoused to longevity risk. A state pension system naturally deals with random variation risk by pooling a large number of different individuals and relying on the law of large numbers to reduce its variability. Trend risk, however is very relevant for state pension system.
In my talk I shall address three questions. What is the impact of longevity risk on pension expenditure? Which type of social security reform is appropriate to deal with longevity risk ? What are the financial instruments that allow agents and institutions to hedge their trend longevity risk?