Pension regulation and the market value of pension liabilities: A contingent claims analysis using Parisian options
We 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.
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.:
- W. Briec & K. Kerstens & O. Jokung, 2007.
"Mean-variance-skewness portfolio performance gauging: A general shortage function and dual approach,"
- Walter Briec & Kristiaan Kerstens & Octave Jokung, 2007. "Mean-Variance-Skewness Portfolio Performance Gauging: A General Shortage Function and Dual Approach," Management Science, 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.
- K. Kerstens, 2005. "Mean-Variance Skewness Portfolio Performance Gauging:A General Shortage Function and Dual Approach," Post-Print hal-00288765, HAL.
- 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.
- 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.
- 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.
- Treynor, Jack L, 1977. "The Principles of Corporate Pension Finance," Journal of Finance, American Finance Association, vol. 32(2), pages 627-38, May.
- Døskeland, Trond M. & Nordahl, Helge A., 2006.
"Optimal Pension Insurance Design,"
2006/14, Department of Business and Management Science, Norwegian School of Economics, revised 21 Jun 2007.
- 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 Working Papers on Insurance and Private Pensions 17, OECD Publishing.
- Colin Pugh, 2006. "Funding Rules and Actuarial Methods," OECD Working Papers on Insurance and Private Pensions 1, OECD Publishing.
- 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.
- Jeremy I. Bulow, 1982. "What are Corporate Pension Liabilities?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(3), pages 435-452.
- 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.
- Stephanie Aaronson & Julia Lynn 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.).
- 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.
- Mitchell A. Petersen, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 1033-1056.
- 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.
- Jorgensen, Peter Lochte, 2007.
"Traffic light options,"
Journal of Banking & Finance,
Elsevier, vol. 31(12), pages 3698-3719, December.
- 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.
- Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
- 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.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- Colin Pugh & Juan Yermo, 2008. "Funding regulations and risk sharing," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 163-196.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1201-1214. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.