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 plan for reorganization and recovery before premature closure is executed. The framework is then used to construct fair pension deals.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 183.
Date of creation: Oct 2008
Date of revision:
Pension funds; DB and DC pension plans; barrier options; Parisian barrier options.;
Other versions of this item:
- Broeders, Dirk & Chen, An, 2010. "Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1201-1214, June.
- 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
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Giuli, Maria Elena & Maggi, Mario Alessandro & Paris, Francesco Maria, 2009. "Deposit guarantee evaluation and incentives analysis in a mutual guarantee system," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1058-1068, June.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Walter Briec & Kristiaan Kerstens & Octave Jokung, 2007.
"Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach,"
INFORMS, vol. 53(1), pages 135-149, January.
- Walter Briec & Kristiaan Kerstens & Octave Jokung, 2005. "Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach," Working Papers 2005-ECO-05, IESEG School of Management.
- Chen, An & Suchanecki, Michael, 2007.
"Default risk, bankruptcy procedures and the market value of life insurance liabilities,"
Insurance: Mathematics and Economics,
Elsevier, vol. 40(2), pages 231-255, March.
- An Chen & Michael Suchanecki, 2006. "Default Risk, Bankruptcy Procedures and the Market Value of Life Insurance Liabilities," Bonn Econ Discussion Papers bgse8_2006, University of Bonn, Germany.
- Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1985.
"Defined Benefit versus Defined Contribution Pension Plans: What are the Real Tradeoffs?,"
NBER Working Papers
1719, National Bureau of Economic Research, Inc.
- Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162 National Bureau of Economic Research, Inc.
- Greg Niehaus & Tong Yu, 2005. "Cash-Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 321-352.
- Jacob A Bikker & Peter J G Vlaar, 2007. "Conditional Indexation in Defined Benefit Pension Plans in the Netherlands*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 32(4), pages 494-515, October.
- Ippolito, Richard A, 1985. "The Labor Contract and True Economic Pension Liabilities," American Economic Review, American Economic Association, vol. 75(5), pages 1031-43, December.
- Colin Pugh, 2006. "Funding Rules and Actuarial Methods," OECD Working Papers on Insurance and Private Pensions 1, OECD Publishing.
- Jorgensen, Peter Lochte, 2007.
"Traffic light options,"
Journal of Banking & Finance,
Elsevier, vol. 31(12), pages 3698-3719, December.
- Blake, David & Lehmann, Bruce N & Timmermann, Allan, 1999. "Asset Allocation Dynamics and Pension Fund Performance," The Journal of Business, University of Chicago Press, vol. 72(4), pages 429-61, October.
- de Jong, Frank, 2008. "Pension fund investments and the valuation of liabilities under conditional indexation," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 1-13, February.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- Colin Pugh & Juan Yermo, 2008. "Funding regulations and risk sharing," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 163-196.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Colin Pugh & Juan Yermo, 2008. "Funding Regulations and Risk Sharing," OECD Working Papers on Insurance and Private Pensions 17, OECD Publishing.
- Bulow, Jeremy I, 1982. "What Are Corporate Pension Liabilities?," The Quarterly Journal of Economics, MIT Press, vol. 97(3), pages 435-52, August.
- Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-38, May.
- Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
- Post, Thierry & van Vliet, Pim & Levy, Haim, 2008. "Risk aversion and skewness preference," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1178-1187, July.
- Døskeland, Trond M. & Nordahl, Helge A., 2008. "Optimal pension insurance design," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 382-392, March.
- Stephanie Aaronson & Julia Coronado, 2005. "Are firms or workers behind the shift away from DB pension plan?," Finance and Economics Discussion Series 2005-17, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Dirk Broeders & An Chen & David Rijsbergen, 2011. "Valuation of Liabilities in Hybrid Pension Plans," DNB Working Papers 326, Netherlands Central Bank, Research Department.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet).
If references are entirely missing, you can add them using this form.