Lognormal Approximation of Complex Pathdependent Pension Scheme Payoffs
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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|Date of creation:||01 Jan 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark|
Phone: +45 3815 3815
Web page: http://www.cbs.dk/departments/finance/
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