Optimal asset allocation for DC pension plans under inflation
AbstractIn this paper, the stochastic dynamic programming approach is used to investigate the optimal asset allocation for a defined-contribution pension plan with downside protection under stochastic inflation. The plan participant invests the fund wealth and the stochastic interim contribution flows into the financial market. The nominal interest rate model is described by the Cox–Ingersoll–Ross (Cox et al., 1985) dynamics. To cope with the inflation risk, the inflation indexed bond is included in the asset menu. The retired individuals receive an annuity that is indexed by inflation and a downside protection on the amount of this annuity is considered. The closed-form solution is derived under the CRRA utility function. Finally, a numerical application is presented to characterize the dynamic behavior of the optimal investment strategy.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 51 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/505554
Defined-contribution pension plan; Inflation risk; Inflation-indexed bond; Stochastic dynamic programming; Minimum guarantee;
Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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