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Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options

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  • Broeders, Dirk
  • Chen, An
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Abstract

We analyze the market-consistent valuation of pension liabilities in a contingent claim framework whereby a knock-out barrier feature is applied to capture early regulatory closure of a pension plan. We investigate two cases which we call "immediate closure procedure" and "delayed closure procedure". In an immediate closure procedure, when the assets value hits the regulatory boundary, the pension plan is terminated immediately. Whereas in a delayed closure procedure, a grace period is given to the pension fund for reorganization and recovery before premature closure is executed. The framework is then used to construct fair pension deals. Furthermore, we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 6 (June)
Pages: 1201-1214

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1201-1214

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Keywords: Pension funds DB and DC pension plans Regulation Parisian barrier options;

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References

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Citations

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Cited by:
  1. Horneff, Wolfram & Maurer, Raimond & Rogalla, Ralph, 2010. "Dynamic portfolio choice with deferred annuities," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2652-2664, November.
  2. Dirk Broeders & An Chen & David Rijsbergen, 2011. "Valuation of Liabilities in Hybrid Pension Plans," DNB Working Papers 326, Netherlands Central Bank, Research Department.
  3. Dirk Broeders & Paul Hilbers & David Rijsbergen & Ningli Shen, 2014. "What Drives Pension Indexation in Turbulent Times? An Empirical Examination of Dutch Pension Funds," De Economist, Springer, vol. 162(1), pages 41-70, March.
  4. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.
  5. Dirk Broeders & An Chen & Birgit Koos, 2009. "An institutional evaluation of pension funds and life insurance companies," DNB Working Papers 227, Netherlands Central Bank, Research Department.

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