Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options
AbstractWe 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 InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 34 (2010)
Issue (Month): 6 (June)
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Web page: http://www.elsevier.com/locate/jbf
Pension funds DB and DC pension plans Regulation Parisian barrier options;
Other versions of this item:
- Dirk Broeders & An Chen, 2008. "Pension regulation and the market value of pension liabilities - a contingent claims analysis using Parisian options," DNB Working Papers 183, Netherlands Central Bank, Research Department.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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