The Value of Pension Benefit Guaranty Corporation Insurance
AbstractThis paper considers the cost of Pension Benefit Guaranty Corporation (PBGC) insurance for single-employer defined benefit pension plans. It derives a formula for the PBGC's liability that explicitly recognizes the two necessary conditions that must arise for the PBGC to sustain a loss. First, the corporation sponsoring the pension Iund must undergo bankruptcy and, second, this pension plan must be underfunded. The PBGC's liability is valued as a contingent put option and expressed as infinite series of modified Bessel functions. The comparative statics of the model are examined and are quite consistent with economic intuition. Copyright 1994 by Ohio State University Press.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 26 (1994)
Issue (Month): 3 (August)
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Other versions of this item:
- George G. Pennacchi & Christopher M. Lewis, 1994. "The value of Pension Benefit Guaranty Corporation insurance," Proceedings, Federal Reserve Bank of Cleveland, pages 735-756.
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