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Lognormal Approximation of Complex Pathdependent Pension Scheme Payoffs

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  • Løchte Jørgensen, Peter

    (Department of Finance, Copenhagen Business School)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Løchte Jørgensen, Peter, 2006. "Lognormal Approximation of Complex Pathdependent Pension Scheme Payoffs," Working Papers 2006-9, Copenhagen Business School, Department of Finance.
    • Handle: RePEc:hhs:cbsfin:2006_009
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7142
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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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