On "optimal pension management in a stochastic framework" with exponential utility
AbstractThis paper reconsiders the optimal asset allocation problem in a stochastic framework for defined-contribution pension plans with exponential utility, which has been investigated by Battocchio and Menoncin [Battocchio, P., Menoncin, F., 2004. Optimal pension management in a stochastic framework. Insurance: Math. Econ. 34, 79-95]. When there are three types of asset, cash, bond and stock, and a non-hedgeable wage risk, the optimal pension portfolio composition is horizon dependent for pension plan members whose terminal utility is an exponential function of real wealth (nominal wealth-to-price index ratio). With market parameters usually assumed, wealth invested in bond and stock increases as retirement approaches, and wealth invested in cash asset decreases. The present study also shows that there are errors in the formulation of the wealth process and control variables in solving the optimization problem in the study of Battocchio and Menoncin, which render their solution erroneous and lead to wrong results in their numerical simulation.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 49 (2011)
Issue (Month): 1 (July)
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Web page: http://www.elsevier.com/locate/inca/505554
IB81 IM12 Defined-contribution pension plan Wage risk Inflation Optimal asset allocation Exponential utility Hamilton-Jacobi-Bellman equation;
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LSE Research Online Documents on Economics
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- 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.
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