Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs

Peter Løchte Jørgensen

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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.
Original languageEnglish
Place of PublicationAarhus
PublisherAarhus School of Business
Number of pages34
Publication statusPublished - 2006
Externally publishedYes
SeriesFinance Research Group Working Papers
NumberF-2006-09

Keywords

  • Account-based pension scheme
  • Return smoothing
  • Payoff distributions
  • Density approximation
  • Monte Carlo simulation
  • Asian options

Cite this

Løchte Jørgensen, P. (2006). Lognormal Approximation of Complex Path-dependent Pension Scheme Payoffs. Aarhus School of Business. Finance Research Group Working Papers, No. F-2006-09