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Title: Essays on Pension Allocation and Pension Debt Valuation
Author: Jin, Wei
ISNI:       0000 0001 3590 7145
Awarding Body: Birkbeck (University of London)
Current Institution: Birkbeck (University of London)
Date of Award: 2008
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There are two important issues associated with pension plans. First how pension funds allocate pension assets and how demographics affect pension allocation. Second, how pension liability is valued and what the appropriate pension default premium and the discount rate for pension liability should be. Currently there are no convincing ways to find the optimal asset allocation and to calculate the value and the proper default premium and discount rate of pension liability. This thesis aims to address these two important yet unsettled issues. In the first chapter I introduce to the background of the research project, the pension system and the current situation ofpension practice and research. In the second chapter I provide an empirical study on how demographics affect pension allocation. I examine data from six countries dating from 1983-2005 and confirm that pension asset allocation is indeed affected by population profile. Next in chapter three I propose a theoretical model for pension allocation. Unlike other research in which the utility function is Relative Risk Aversion and therefore not consistent with the real data, I have based my model on a HARA (Hyperbolic Absolute Risk Aversion) utility function. I also impose cash repayment constraints on the pension funds' behavior. The model suggests that when pension funds are at their immature stage they tend to increase risky asset holdings but when pension funds reach their mature stage, they will increase risk free asset holdings and, accordingly, the price ofrisky assets may drop. In the last chapter, I construct a model to value pension liability and extract the corresponding pension discount rate. Unlike other models, I distinguish the common corporate bonds and pension fund liabilities based on the observation that pension default is ajoint event of the bankruptcy of the sponsor and the insufficient funding level of the pension plan. I derive an explicit solution to the pension spread and undertake static analysis of the influence of the financial condition ofthe sponsoring firm, the aging population and pension asset allocation. High aging rate, high investment risk strategies of the pension funds and bad financial conditions of the sponsoring firm increase the pension spread.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available