Advanced Search
MyIDEAS: Login

Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion

Contents:

Author Info

  • Blake, David
  • Wright, Douglas
  • Zhang, Yumeng

Abstract

Assuming the loss aversion framework of Tversky and Kahneman (1992), stochastic investment and labour income processes, and a path-dependent fund target, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven ‘threshold’ strategy, whereby the equity allocation is increased if the accumulating fund is below target and is decreased if it is above. However, if the fund is sufficiently above target, the optimal investment strategy switches to ‘portfolio insurance’. We show that the risk of failing to attain the target replacement ratio is significantly lower with target-driven strategies than with those associated with the maximisation of expected utility.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0165188912001704
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 195-209

as in new window
Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:195-209

Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Defined contribution pension plan; Investment strategy; Loss aversion; Target replacement ratio; Threshold strategy; Portfolio insurance; Dynamic programming;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Vigna, Elena & Haberman, Steven, 2001. "Optimal investment strategy for defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 233-262, April.
  3. Arjan B. Berkelaar & Roy Kouwenberg & Thierry Post, 2004. "Optimal Portfolio Choice under Loss Aversion," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 973-987, November.
  4. David Blake & Andrew Cairns & Kevin Dowd, 2007. "The Impact of Occupation and Gender on Pensions from Defined Contribution Plans," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 32(4), pages 458-482, October.
  5. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin, 2006. "Stochastic lifestyling: Optimal dynamic asset allocation for defined contribution pension plans," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 843-877, May.
  6. Haberman, Steven & Vigna, Elena, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 35-69, August.
  7. Boulier, Jean-Francois & Huang, ShaoJuan & Taillard, Gregory, 2001. "Optimal management under stochastic interest rates: the case of a protected defined contribution pension fund," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 173-189, April.
  8. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  9. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2001. "Pensionmetrics: stochastic pension plan design and value-at-risk during the accumulation phase," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 187-215, October.
  10. Francisco J. Gomes, 2005. "Portfolio Choice and Trading Volume with Loss-Averse Investors," The Journal of Business, University of Chicago Press, vol. 78(2), pages 675-706, March.
  11. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
  12. Gerrard, Russell & Haberman, Steven & Vigna, Elena, 2004. "Optimal investment choices post-retirement in a defined contribution pension scheme," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 321-342, October.
  13. Emms, Paul, 2012. "Lifetime investment and consumption using a defined-contribution pension scheme," Journal of Economic Dynamics and Control, Elsevier, vol. 36(9), pages 1303-1321.
  14. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  15. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711.
  16. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, 04.
  17. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  18. Steven Haberman & Elena Vigna, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," ICER Working Papers - Applied Mathematics Series 09-2002, ICER - International Centre for Economic Research.
  19. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  20. Steffensen, Mogens, 2011. "Optimal consumption and investment under time-varying relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 659-667, May.
  21. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Yao, Haixiang & Yang, Zhou & Chen, Ping, 2013. "Markowitz’s mean–variance defined contribution pension fund management under inflation: A continuous-time model," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 851-863.
  2. Di Giacinto, Marina & Federico, Salvatore & Gozzi, Fausto & Vigna, Elena, 2014. "Income drawdown option with minimum guarantee," European Journal of Operational Research, Elsevier, vol. 234(3), pages 610-624.
  3. Yao, Haixiang & Lai, Yongzeng & Ma, Qinghua & Jian, Minjie, 2014. "Asset allocation for a DC pension fund with stochastic income and mortality risk: A multi-period mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 84-92.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:195-209. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.