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Valuation of pension liabilities in incomplete markets*

Published online by Cambridge University Press:  23 May 2008

FRANK DE JONG
FRANK DE JONG*
Affiliation:
Tilburg University and Netspar
*
Correspondence address: Department of Finance, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, the Netherlands. E-mail: f.dejong@uvt.nl.
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Abstract

This paper discusses the valuation of wage-indexed pension liabilities. Valuation of these contingent claims by replication is typically not possible as the wage index cannot be hedged perfectly with financial market instruments. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 7 , Issue 3 , November 2008 , pp. 277 - 294
Copyright
Copyright © 2008 Cambridge University Press

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Footnotes

*

Thanks to Lans Bovenberg, Ralph Koijen, Vicky Henderson, Roger Laeven, Antoon Pelsser, Peter Schotman and participants at the University of Warwick Pensions and Long Term Investment conference (March 2007) and the Integrated Risk Management conference at Tilburg University (April 2007) for useful discussions and comments on earlier versions.

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