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Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs

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Author Info
Jørgensen, Peter Løchte () (Department of Business Studies, Aarhus School of Business)
Abstract

This paper analyzes an explicit return smoothing mechanism which has recently been

introduced as part of a new type of pension savings contract that has been offered by Danish life insurers. We establish the payoff function implied by the return smoothing mechanism and show that its probabilistic properties are accurately approximated by a suitably adapted lognormal distribution. The quality of the lognormal approximation is explored via a range of simulation based numerical experiments, and we point to several other potential practical applications of the paper’s theoretical results.

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Publisher Info
Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2006-09.

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Length: 38 pages
Date of creation: 21 Nov 2006
Date of revision:
Handle: RePEc:hhb:aarbfi:2006-09

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
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Related research
Keywords: Account-based pension schemes return smoothing payoff distributions density approximation Monte Carlo simulation Asian options

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References listed on IDEAS
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.:
  1. Boyle, Phelim P. & Hardy, Mary R., 1997. "Reserving for maturity guarantees: Two approaches," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 113-127, November. [Downloadable!] (restricted)
  2. Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: theory," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 3-33, August. [Downloadable!] (restricted)
  3. Guillen, Montserrat & Jorgensen, Peter Lochte & Nielsen, Jens Perch, 2006. "Return smoothing mechanisms in life and pension insurance: Path-dependent contingent claims," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 229-252, April. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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