Lognormal Approximation of Complex Path-Dependent Pension Scheme Payoffs

Peter Jørgensen ()

The European Journal of Finance, 2007, vol. 13, issue 7, 595-619

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)
Date: 2007
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Related works:
Working Paper: Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs (2006)
Working Paper: Lognormal Approximation of Complex Pathdependent Pension Scheme Payoffs (2006)
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DOI: 10.1080/13518470701201645

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