The Pricing Model of Pension Benefit Guaranty Corporation Insurance with Regime-Switching Processes

Ting-Fu Chen, Shih-Kuei Lin, An-Sing Chang and Wei-Hao Wang
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Ting-Fu Chen: Department of Applied Mathematics, Feng Chia University, Taichung 407, Taiwan
Shih-Kuei Lin: Department of Money and Banking, National Chengchi University, Taipei City 116, Taiwan
An-Sing Chang: Department of Money and Banking, National Chengchi University, Taipei City 116, Taiwan
Wei-Hao Wang: Cathay Life Insurance, Taipei City 106, Taiwan

JRFM, 2022, vol. 15, issue 6, 1-23

Abstract: This paper aims to evaluate Pension Benefit Guaranty Corporation (PBGC) insurance values through regime-switching models. We separate periods of the economy with faster growth from those with slower growth to observe long-term trends in the economy. We derive a fair PBGC insurance pricing formula under distress termination and intervention termination using regime-switching processes. We set parameters by estimating the S&P 500 index and one-year treasury bills via expectation maximization particle swarm optimization (EM-PSO)-Gradient, which is an extension of the EM-Gradient method. Then, we conduct sensitivity analysis to investigate the impact of model parameters on insurance values. According to the maximum likelihood estimation results, the Akaike information criterion (AIC) and Bayesian information criterion (BIC) estimators show that the regime-switching process has better goodness of fit than the geometric Brownian motion. Scenario analysis also supports the adequacy of our pricing formula.

Keywords: pension benefit; PBGC insurance; regime-switching; EM algorithm (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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