Picture of sea vessel plough through rough maritime conditions

Innovations in marine technology, pioneered through Open Access research...

Strathprints makes available scholarly Open Access content by researchers in the Department of Naval Architecture, Ocean & Marine Engineering based within the Faculty of Engineering.

Research here explores the potential of marine renewables, such as offshore wind, current and wave energy devices to promote the delivery of diverse energy sources. Expertise in offshore hydrodynamics in offshore structures also informs innovations within the oil and gas industries. But as a world-leading centre of marine technology, the Department is recognised as the leading authority in all areas related to maritime safety, such as resilience engineering, collision avoidance and risk-based ship design. Techniques to support sustainability vessel life cycle management is a key research focus.

Explore the Open Access research of the Department of Naval Architecture, Ocean & Marine Engineering. Or explore all of Strathclyde's Open Access research...

Pension plan solvency and extreme market movements : a regime switching approach

Abouraschi, Niloufar and Clacher, Iain and Freeman, Mark and Hillier, David and Kemp, Malcolm and Zhang, Qi (2014) Pension plan solvency and extreme market movements : a regime switching approach. European Journal of Finance. ISSN 1351-847X

PDF (Pension Plan Solvency and Extreme Market Movements: A Regime Switching Approach)
Accepted Author Manuscript

Download (1MB) | Preview


We develop and test a new approach to assess defined benefit pension plan solvency risk in the presence of extreme market movements. Our method captures both the ‘fat-tailed’ nature of asset returns and their correlation with discount rate changes. We show that the standard assumption of constant discount rates leads to dramatic underestimation of future projections of pension plan solvency risk. Failing to incorporate leptokurtosis into asset returns also leads to downward biased estimates of risk, but this is less pronounced than the time-varying discount rate e§ect. Further modifying the model to capture the correlation between asset returns and the discount rate provides additional improvements in the projection of future pension plan solvency. This reduces the perceived future risk of underfunding because of the negative correlation between interest rate changes and asset returns. These results have important implications for those with responsibility for balancing risk against expected return when seeking to improve the current poor funding positions of defined benefit pension schemes.