臺大管理論叢 NTU Management Review VOL.29 NO.2

Effect of Inflation on the Cost of Inflation-Linked Annuities Considering Stochastic Interest Rate and Inflation Rate Models 56 Conventional inflation-linked annuities do not set barriers on inflation. Numerous hard-to-meet real retirement regulations exist globally; for example, in the United States monthly retirement payments are linked to the consumer price index; if the inflation rate is greater than 3%, the monthly retirement payment is adjusted by inflation minus 1%; if the inflation rate is between 2% and 3%, the payment is adjusted by 2%; when the inflation rate is less than 2%, the payment is adjusted by the inflation rate. As such, the contribution of this paper is the development of a general model for inflation-linked annuities with a cap and floor to meet real-world requirements. This model can be used for ordinary annuities without inflation risk, inflation-linked annuities without a cap and floor, inflation-linked annuities with a cap, and inflation-linked annuities with a floor by using various specific model parameters. Therefore, the valuation framework can help annuity providers understand the cost of inflation-linked annuities.