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Optimal Early Retirement Near the Expiration of a Pension Plan

Author

Listed:
  • E. Chevalier

    (Université d’Évry-Val d’Essonne)

Abstract

In a recent paper, Friedman and Shen (Finance Stoch 6: 273–302, 2002) have considered a pension plan with the option of early retirement. They showed that the financial value V of the retirement benefits is the solution of a variational inequality and have studied the associated free boundary. A description of the free boundary near maturity is given, thanks to integral equation methods. However, V is also the solution of an optimal stopping problem very close to the American option valuation problem. Comparing V to specific options, we derive an expansion of the free boundary near the expiration of the pension plan.

Suggested Citation

  • E. Chevalier, 2006. "Optimal Early Retirement Near the Expiration of a Pension Plan," Finance and Stochastics, Springer, vol. 10(2), pages 204-221, April.
    • Handle: RePEc:spr:finsto:v:10:y:2006:i:2:d:10.1007_s00780-006-0003-7
    DOI: 10.1007/s00780-006-0003-7
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    References listed on IDEAS

    as
    1. Avner Friedman & Weixi Shen, 2002. "A variational inequality approach to financial valuation of retirement benefits based on salary," Finance and Stochastics, Springer, vol. 6(3), pages 273-302.
    2. Etienne Chevalier, 2005. "Critical Price Near Maturity For An American Option On A Dividend‐Paying Stock In A Local Volatility Model," Mathematical Finance, Wiley Blackwell, vol. 15(3), pages 439-463, July.
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    Citations

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    Cited by:

    1. Tiziano Angelis & Gabriele Stabile, 2019. "On the free boundary of an annuity purchase," Finance and Stochastics, Springer, vol. 23(1), pages 97-137, January.
    2. Calvo-Garrido, Maria del Carmen & Pascucci, Andrea & Vázquez Cendón, Carlos, 2012. "Mathematical analysis and numerical methods for pricing pension plans allowing early retirement," MPRA Paper 36494, University Library of Munich, Germany.

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    More about this item

    Keywords

    Free boundary; Optimal stopping; Variational inequality;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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