Pricing pension buy-outs under stochastic interest and mortality rates


ARIK A., Yolcu-Okur Y., ŞAHİN Ş., UĞUR Ö.

SCANDINAVIAN ACTUARIAL JOURNAL, no.3, pp.173-190, 2018 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Publication Date: 2018
  • Doi Number: 10.1080/03461238.2017.1328370
  • Journal Name: SCANDINAVIAN ACTUARIAL JOURNAL
  • Journal Indexes: Science Citation Index Expanded, Social Sciences Citation Index, Scopus
  • Page Numbers: pp.173-190

Abstract

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.