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Sensitivity of Pension Fund's Balance Sheet: a non-linear risk factor approach

Author

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  • Zhun Peng

    (University of Evry and EPEE)

Abstract

In this paper, we study the funding situation of a representative pension fund when it is exposed to extreme shocks of financial markets. We measure the exposure of both asset and liability sides of the fund’s balance sheet and especially when the benefit obligations use a market based discount rate. By assigning different market indexes to the main items of the fund’s balance sheet, we are able to compute the expected funded status conditionally on extreme shocks to different financial markets. We also take into account the links between the corresponding indexes thanks to the CVine Risk Factor (CVRF) model combining factors and copulas. In particular we are able to measure the exposure of the funding status of the fund to extreme shocks to different risk factors (equity, bond, real estate etc...). We find that the fund is particularly exposed to large shocks to the equity risk factor, even if diversification benefits can exist because such shocks simultaneously induce a drop in the asset values and a decrease in the discounted value of the liabilities. However, the first decrease is larger than the second one, thus the funding situation is declined.

Suggested Citation

  • Zhun Peng, 2015. "Sensitivity of Pension Fund's Balance Sheet: a non-linear risk factor approach," Documents de recherche 15-06, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:15-06
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    File URL: https://www.univ-evry.fr/fileadmin/mediatheque/ueve-institutionnel/03_Recherche/laboratoires/Epee/wp/15-06.pdf
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    References listed on IDEAS

    as
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    4. Catherine Bruneau & Alexis Flageollet & Zhun Peng, 2015. "Risk Factors, Copula Dependence and Risk Sensitivity of a Large Portfolio," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01166135, HAL.
    5. Catherine Bruneau & Alexis Flageollet & Zhun Peng, 2015. "Risk Factors, Copula Dependence and Risk Sensitivity of a Large Portfolio," Documents de recherche 15-03, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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    9. repec:dau:papers:123456789/13624 is not listed on IDEAS
    10. Catherine Bruneau & Alexis Flageollet & Zhun Peng, 2015. "Risk Factors, Copula Dependence and Risk Sensitivity of a Large Portfolio," Post-Print halshs-01166135, HAL.
    11. Colin Pugh & Juan Yermo, 2008. "Funding Regulations and Risk Sharing," OECD Working Papers on Insurance and Private Pensions 17, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Regular vine copula; Factorial model; Pension Funds; Stress testing;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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