Pricing pension buy-outs under stochastic interest and mortality rates

Arik, Ayse, Yolcu-Okur, Yeliz, Sahin, Sule ORCID: 0000-0003-4080-9165 and Ugur, Omur
(2018) Pricing pension buy-outs under stochastic interest and mortality rates. Scandinavian Actuarial Journal, 2018 (3). pp. 173-190.

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Pension buy-out is a special financial asset issued to offload the pension liabilities holistically in exchange for an upfront premium. In this paper, we concentrate on the pricing of pension buy-outs under dependence between interest and mortality rates risks with an explicit correlation structure in a continuous time framework. Change of measure technique is invoked to simplify the valuation. We also present how to obtain the buy-out price for a hypothetical benefit pension scheme using stochastic models to govern the dynamics of interest and mortality rates. Besides employing a non-mean reverting specification of the Ornstein–Uhlenbeck process and a continuous version of Lee–Carter setting for modeling mortality rates, we prefer Vasicek and Cox–Ingersoll–Ross models for short rates. We provide numerical results under various scenarios along with the confidence intervals using Monte Carlo simulations.

Item Type: Article
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Uncontrolled Keywords: Change of measure, defined benefit pension plan, interest rate risk, mortality risk, pension buy-out, stochastic models
Depositing User: Symplectic Admin
Date Deposited: 07 Dec 2018 12:42
Last Modified: 16 Dec 2022 05:57
DOI: 10.1080/03461238.2017.1328370
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