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Capital structure choices, pension fund allocation decisions and the rational pricing of liability streams

Published online by Cambridge University Press:  18 February 2021

Lionel Martellini
Affiliation:
EDHEC-Risk Institute, EDHEC Business School, Nice, France
Vincent Milhau*
Affiliation:
EDHEC-Risk Institute, EDHEC Business School, Nice, France
*
*Corresponding author. Email: vincent.milhau@edhec.edu

Abstract

This paper introduces an integrated asset-liability management model that allows for the joint quantitative analysis of capital structure choices, pension fund allocation decisions and rational pricing of liabilities. We confirm that capital structure decisions have a substantial impact on the value of pension claims, and we provide a quantitative assessment of the mispricing induced by the use of an arbitrary regulatory discount rate. We also present a quantitative assessment of the asset substitution effect implied by a change in the pension fund allocation to risky assets taking place after the corporate and pension obligation claims have been issued.

Type
Article
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press

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