Capital structure choices, pension fund allocation decisions and the rational pricing of liability streams. (18th July 2022)

• Record Type: Journal Article
• Authors: Martellini, Lionel; Milhau, Vincent
• Is Part Of: Journal of pension economics & finance. Volume 21:Number 3(2022)
• Page Start: 425
• Page End: 445
• Publication Date: 2022-07-18
• Subjects: asset-liability management -- capital structure -- corporate pension plan -- default risk; G32 -- J32; Pensions -- Finance -- Periodicals; Social security -- Finance -- Periodicals; 331.25205
• DOI: 10.1017/S1474747221000032
• Languages: English
• ISSNs: 1474-7472

Abstract

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.