Pricing pension buy-outs under stochastic interest and mortality rates

2018-01-01
ARIK, AYŞE
Yolcu-Okur, Yeliz
ŞAHİN, ŞULE
Uğur, Ömür
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.
Citation Formats
A. ARIK, Y. Yolcu-Okur, Ş. ŞAHİN, and Ö. Uğur, “Pricing pension buy-outs under stochastic interest and mortality rates,” pp. 173–190, 2018, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/32668.