Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 38 pages
Date of creation: 21 Nov 2006
Date of revision:
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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
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More information through EDIRC
Account-based pension schemes; return smoothing; payoff distributions; density approximation; Monte Carlo simulation; Asian options;
Other versions of this item:
- Løchte Jørgensen, Peter, 2006. "Lognormal Approximation of Complex Pathdependent Pension Scheme Payoffs," Working Papers 2006-9, Copenhagen Business School, Department of Finance.
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- 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:
- NEP-AGE-2007-06-18 (Economics of Ageing)
- NEP-ALL-2007-06-18 (All new papers)
- NEP-CMP-2007-06-18 (Computational Economics)
- NEP-SEA-2007-06-18 (South East Asia)
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.:
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- 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.
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- 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.
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