Abstract

http://ssrn.com/abstract=1085563
 
 

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Contingent Claims Analysis and Life Cycle Finance


Zvi Bodie


Boston University - Department of Finance & Economics

Jonathan Treussard


Ziff Brothers Investments - Risk Management

Doriana Ruffino


Government of the United States of America - Division of Research and Statistics

January 19, 2012

American Economic Review, Forthcoming

Abstract:     
This paper explores the application of contingent claims analysis (CCA) to two "hot" issues in life-cycle finance: (1) investing for retirement and (2) deciding when, if ever, to switch careers. Participants in individual retirement accounts do not have the time or the knowledge to make their own investment decisions. Today they are defaulted into life-cycle mutual funds that pass all risk directly through to the participant. We use CCA to demonstrate how financial firms can design and produce guaranteed contingent benefit contracts that improve participant welfare at no additional cost to the system. In exploring the career-choice issue in the second part of the paper, we use CCA in a somewhat different way. The decision to switch careers is analogous to deciding when to exercise an American-style option to swap one asset for another. By applying the methods used to analyze the option-exercise decision to the career-switching problem, we gain some new insights beyond those derived from the traditional dynamic programming approaches.

Number of Pages in PDF File: 12

Keywords: Contingent claims, job-switching, life-cycle, Arrow-Debreu securities

JEL Classification: D11, G11, J24

Accepted Paper Series


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Date posted: January 21, 2008 ; Last revised: March 27, 2012

Suggested Citation

Bodie, Zvi and Treussard, Jonathan and Ruffino, Doriana, Contingent Claims Analysis and Life Cycle Finance (January 19, 2012). American Economic Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1085563

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Jonathan Treussard
Ziff Brothers Investments - Risk Management ( email )
New York, NY
United States
Doriana Ruffino
Government of the United States of America - Division of Research and Statistics ( email )
20th and C Streets, NW
Washington, DC 20551
United States
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