Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs

Peter Løchte Jørgensen ()
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Peter Løchte Jørgensen: Department of Business Studies, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://www.asb.dk/staff/bs/plj.aspx?page=%7B803EFF10-69F7-4C0F-AEE3-F7F410E4B6F2%7D

No F-2006-09, Finance Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

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.

Keywords: Account-based pension schemes; return smoothing; payoff distributions; density approximation; Monte Carlo simulation; Asian options (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-cmp and nep-sea
Date: Written 2006-11-21
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