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Lognormal Approximation of Complex Path-Dependent Pension Scheme Payoffs

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  • Peter Løchte Jørgensen

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.

Suggested Citation

  • Peter Løchte Jørgensen, 2007. "Lognormal Approximation of Complex Path-Dependent Pension Scheme Payoffs," The European Journal of Finance, Taylor & Francis Journals, vol. 13(7), pages 595-619.
    • Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:595-619
    DOI: 10.1080/13518470701201645
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    JEL classification:

    • 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

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