# Backtesting the Lee–Carter and the Cairns–Blake–Dowd Stochastic Mortality Models on Italian Death Rates

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## Abstract

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## 1. Introduction

- an important research front on problems related to the parameter estimations (Booth et al. 2006), with many applications also in the actuarial and economics literature (Loisel and Serant 2007); and
- extension of the forecasting analysis with disaggregated projections on demographic subsets to maintain consistency at the aggregate level (Lee and Miller 2001; Li and Lee 2005; Li 2010).

- fixed horizon backtests: lookback and lookforward windows of 20 years;
- jumping fixed-length horizon backtests: lookback window of 20 years and lookforward window of 5 years (short-term projections); and
- rolling fixed-length horizon backtests: lookback window of fixed-length (20 years) and a contracting lookforward window from 20 to 2 years of projections.

## 2. Model Specifications

#### 2.1. The Lee–Carter Model

- ${k}_{t}$ is the time index representing the level of mortality at time t;
- ${\alpha}_{x}$ represents the average trend of mortality on the time horizon at age x;
- ${\beta}_{x}$ represents a measure of the sensitivity in movement from the parameter ${k}_{t}$. In particular, ${\beta}_{x}$ describes the relative speed of mortality changes, at each age, when ${k}_{t}$ changes; and
- ${\epsilon}_{x,t}$ is the homoskedastic error term, which incorporates historical trends not considered by the model. It is assumed to be ${\epsilon}_{x,t}\sim \mathcal{N}(0,{\sigma}_{\epsilon}^{2})$.

#### 2.2. The Cairns–Blake–Dowd Model

- ${k}_{t}^{\left(1\right)}$ and ${k}_{t}^{\left(2\right)}$ are two stochastic processes and represent the two time indexes of the model;
- ${q}_{x,t}$ and ${p}_{x,t}$ represent, respectively, the death and the survival probability, at time t for an individual aged x;
- $ln\left[\frac{{q}_{x,t}}{{p}_{x,t}}\right]=ln\left({\varphi}_{x}\right)=logit$ ${q}_{x,t}$ is the logit transformation of ${q}_{x,t}$, with ${\varphi}_{x}$ representing the mortality odds;
- $\overline{x}$ is the mean age of the considered interval of ages; and
- ${\epsilon}_{x,t}$ is the error term that encloses the historical trend that the model does not express. All of the error terms are i.i.d following the Normal distribution with mean 0 and variance ${\sigma}_{\epsilon}^{2}$.

## 3. Case Study: Italian Mortality Data from 1975 to 2014

## 4. Backtesting Analysis

- The fixed horizon backtest uses a fixed twenty-year historical “lookback” interval, $1975\le t\le 1994$ , and a fixed “lookforward” horizon, $1995\le t\le 2014$ (20 years).
- The jumping fixed-length horizon backtests make short run projections of five years10 and keep fixed the length of the “lookback” horizon (20 years), but make jumps of five years ahead to cover the “lookforward” interval, $1995\le t\le 2014$. This analysis is divided into four groups of estimations and forecast, described in Table 2.
- Finally, the rolling fixed-length horizon backtests keep fixed the length of the “lookback” horizon (i.e., 20 years) and let it roll ahead year by year. The projections are made over the remaining horizon, keeping fixed the last year of the projection at $t=2014$. This analysis is divided into nineteen groups of estimations and forecast, described in Table 3.

- Both models slightly suffer the cohort effect for both populations over the projection horizon (1995–2014) for the same cohort aged 77–79 in 1995 that is no longer observed from 2006. In particular, both models show an underestimated forecast for such birth cohorts on both sexes with observed values above the upper limit of the confidence interval for some ages of the cohort. This occurred particularly for males.
- The observed male ${q}_{x,t}$ for individuals aged 57–59 in 1995 and 76–78 in 2014, respectively, are often under the lower extreme of the forecast confidence interval. It seems that models have replicated the cohort effect over an homologous cohort in 1995, but since the male mortality evolution has changed consistently from 1975–1994 to 1995–2014, the two homologous cohorts (i.e., 57–59 in 1975 and 57–59 in 1995) showed different trends that lead to forecast errors. This scenario does not occur for females, since women experienced a more ordinary mortality evolution. Therefore, the homologous cohorts are similar, so the bias is not observable.

#### 4.1. Fixed Horizon Backtest (1995–2014)

#### 4.2. Jumping Fixed-Length Horizon Backtests

#### 4.3. Rolling Fixed-Length Horizon Backtests

## 5. Conclusions

## Acknowledgments

## Author Contributions

## Conflicts of Interest

## Appendix A. Lee–Carter Estimation and Projection

#### Appendix A.1. Parameter Estimations

#### Appendix A.2. Parameter Projection

## Appendix B. Cairns–Blake–Dowd Estimation and Projection

- $\mu $ is a constant 2 × 1 vector of drifts, computed as the arithmetic mean of the differenced series of estimated parameters;
- C is a constant 2 × 2 upper triangular matrix, derived by the unique Cholesky decomposition of the variance–covariance matrix $V=C{C}^{\prime}$ of the parameters vector ${\overrightarrow{k}}_{t+1}$; and
- $N(t+1)$ is a two-dimensional standard normal random variable.

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1 | Refer to Cairns et al. (2009) for a detailed list and quantitative comparison of the principal stochastic mortality models. |

2 | ISTAT population projections 2011–2065: http://demo.istat.it/uniprev2011/note.html. |

3 | Particularly for the case of Cairns–Blake–Dowd model. |

4 | Data downloaded on June 2016. Source: http://demo.istat.it/tvm2016/index.php?lingua=eng. |

5 | For the sake of simplicity, we decided to adopt the same terminology used by Dowd et al. (2010a). |

6 | The variables ${d}_{x,t}$ and ${L}_{x,t}$ are the common biometric functions as described in the life tables. |

7 | |

8 | Even though the backtesting analysis will be focused on the interval of ages 57–90, here we decided to provide information also on ages lower than $x=57$. In this way, we are able to present a more accurate Italian demographic scenario for the period observed. |

9 | The starting point for the final age interval is denoted by w. |

10 | We made a forecast of each year in the short-run projection window (5 years). |

11 | Even though the LC and CBD models do not take into account social factors in their original formulation, several other studies have considered heterogeneity and vitality factors (Li and Anderson 2009; Li and Anderson 2013). |

12 | For this reason, we decided to plot exclusively the ${\beta}_{x}$ dynamics, since they show a more interesting variability with respect to the ${k}_{t}$ parameters that, in this case, are barely distant parallel and smooth curves among backtest jumps. |

13 | The choice for the year 2014 was motivated by the observed regular mortality path. The 2015 mortality trend is expected to be increased, particularly at old ages (Istat 2016). |

14 | These represent the initial years of the 20-year-long database; i.e., 1975 refers to the estimation period 1975–1994, and so on. |

15 | Equation (A3) has no explicit solution, so it has to be solved numerically. |

16 | We used MATLAB (R2010b, The MathWorks, Inc., Natick, Massachusetts 01760 USA) for estimation and forecast. |

17 | We used MATLAB for estimation and forecast. |

**Figure 7.**LC Fixed Horizon Backtest forecast: comparison between observed death rates and the corresponding 95% confidence interval of the forecast based on the time series 1975–1994.

**Figure 9.**CBD Fixed Horizon Backtest forecast: comparison between observed death rates and the corresponding 95% confidence interval of the forecast based on the time series 1975–1994.

**Figure 10.**Fixed Horizon Backtest forecast: comparison between CBD and LC confidence intervals at age 85.

**Figure 12.**LC and CBD $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio: comparison between models. Note: the curves represent the average of the $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio over the five-years forecast horizon.

**Figure 14.**LC and CBD $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio: comparison between models on the same gender. Note: the curves represent the average of the $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio over the five-years forecast horizon.

**Figure 15.**LC Rolling Fixed-Length Horizon Backtests: $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio 2014.

**Figure 16.**CBD Rolling Fixed-Length Horizon Backtests: $\frac{{q}_{x,t}^{P}}{{q}_{x,t}^{O}}$ ratio 2014.

Italian Period Life Tables | |||||||||
---|---|---|---|---|---|---|---|---|---|

Ages | 1975 | 1980 | 1985 | 1990 | 1995 | 2000 | 2005 | 2010 | 2014 |

Male | |||||||||

50 | 0.9438 | 0.9483 | 0.9554 | 0.9583 | 0.9591 | 0.9662 | 0.9722 | 0.9755 | 0.9777 |

60 | 0.8406 | 0.8487 | 0.8646 | 0.8839 | 0.8951 | 0.90962 | 0.9242 | 0.9324 | 0.9376 |

70 | 0.6292 | 0.6409 | 0.6691 | 0.7081 | 0.7351 | 0.7732 | 0.8060 | 0.8257 | 0.8385 |

80 | 0.3014 | 0.3161 | 0.3539 | 0.4029 | 0.4406 | 0.4936 | 0.5434 | 0.5912 | 0.6188 |

90 | 0.0464 | 0.0527 | 0.0682 | 0.0954 | 0.1170 | 0.1396 | 0.1648 | 0.1996 | 0.2250 |

95 | 0.0080 | 0.0096 | 0.0140 | 0.0235 | 0.0318 | 0.0401 | 0.0491 | 0.0595 | 0.0743 |

Female | |||||||||

50 | 0.9703 | 0.9739 | 0.9769 | 0.9785 | 0.9796 | 0.9822 | 0.9850 | 0.9865 | 0.9871 |

60 | 0.9194 | 0.9290 | 0.9364 | 0.9427 | 0.9473 | 0.9525 | 0.9585 | 0.9620 | 0.9639 |

70 | 0.8009 | 0.8168 | 0.8337 | 0.8546 | 0.8681 | 0.8828 | 0.8972 | 0.9053 | 0.9087 |

80 | 0.5070 | 0.5403 | 0.5814 | 0.6249 | 0.6576 | 0.69561 | 0.7322 | 0.7540 | 0.7674 |

90 | 0.1154 | 0.1433 | 0.1629 | 0.2141 | 0.2547 | 0.2860 | 0.3297 | 0.3653 | 0.3878 |

95 | 0.0226 | 0.0326 | 0.0380 | 0.0626 | 0.0830 | 0.1030 | 0.1259 | 0.1420 | 0.1654 |

Lookback Horizon | Lookforward Horizon |
---|---|

1975–1994 | 1995–1999 |

1980–1999 | 2000–2004 |

1985–2004 | 2005–2009 |

1990–2009 | 2010–2014 |

Lookback | Lookforward | Lookback | Lookforward |
---|---|---|---|

1975–1994 | 1995–2014 (20) | 1985–2004 | 2005-2014 (10) |

1976–1995 | 1996–2014 (19) | 1986–2005 | 2006–2014 (9) |

1977–1996 | 1997–2014 (18) | 1987–2006 | 2007–2014 (8) |

1978–1997 | 1998–2014 (17) | 1988–2007 | 2008–2014 (7) |

1979–1998 | 1999–2014 (16) | 1989–2008 | 2009–2014 (6) |

1980–1999 | 2000–2014 (15) | 1990–2009 | 2010–2014 (5) |

1981–2000 | 2001–2014 (14) | 1991–2010 | 2011–2014 (4) |

1982–2001 | 2002–2014 (13) | 1992–2011 | 2012–2014 (3) |

1983–2002 | 2003–2014 (12) | 1993–2012 | 2013–2014 (2) |

1984–2003 | 2004–2014 (11) |

**Table 4.**Root Mean Squared Errors (RMSE) between observed ${q}_{x,t}^{O}$ and forecast ${q}_{x,t}^{P}$.

Fixed Horizon Backtest | ||||
---|---|---|---|---|

CBD model | LC model | |||

Prediction Years | Male | Female | Male | Female |

1995-2014 | 0.00625 | 0.00401 | 0.00596 | 0.00274 |

Jumping Fixed-Length Horizon Backtests | ||||

CBD model | LC model | |||

Prediction Years | Male | Female | Male | Female |

1995–1999 | 0.00321 | 0.00201 | 0.00386 | 0.00210 |

2000–2004 | 0.00470 | 0.00411 | 0.00532 | 0.00369 |

2005–2009 | 0.00373 | 0.00366 | 0.00455 | 0.00301 |

2010–2014 | 0.00250 | 0.00229 | 0.00299 | 0.00219 |

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**MDPI and ACS Style**

Maccheroni, C.; Nocito, S.
Backtesting the Lee–Carter and the Cairns–Blake–Dowd Stochastic Mortality Models on Italian Death Rates. *Risks* **2017**, *5*, 34.
https://doi.org/10.3390/risks5030034

**AMA Style**

Maccheroni C, Nocito S.
Backtesting the Lee–Carter and the Cairns–Blake–Dowd Stochastic Mortality Models on Italian Death Rates. *Risks*. 2017; 5(3):34.
https://doi.org/10.3390/risks5030034

**Chicago/Turabian Style**

Maccheroni, Carlo, and Samuel Nocito.
2017. "Backtesting the Lee–Carter and the Cairns–Blake–Dowd Stochastic Mortality Models on Italian Death Rates" *Risks* 5, no. 3: 34.
https://doi.org/10.3390/risks5030034