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.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Petersen, Mitchell A, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1033-56, August.
- 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.
- Colin Pugh & Juan Yermo, 2008. "Funding Regulations and Risk Sharing," OECD Working Papers on Insurance and Private Pensions 17, OECD Publishing.
- Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Jorgensen, Peter Lochte, 2007.
"Traffic light options,"
Journal of Banking & Finance,
Elsevier, vol. 31(12), pages 3698-3719, December.
- Bulow, Jeremy I, 1982. "What Are Corporate Pension Liabilities?," The Quarterly Journal of Economics, MIT Press, vol. 97(3), pages 435-52, August.
- 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.).
- Colin Pugh, 2006. "Funding Rules and Actuarial Methods," OECD Working Papers on Insurance and Private Pensions 1, OECD Publishing.
- 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.
- 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.
- Colin Pugh & Juan Yermo, 2008. "Funding regulations and risk sharing," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2008(1), pages 163-196.
- 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.
- 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.
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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.