This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Mean-variance inefficiency of CRRA and CARA utility functions for portfolio selection in defined contribution pension schemes

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Elena Vigna
Abstract

We consider the portfolio selection problem in the accumulation phase of a defined contribution pension scheme in continuous time, and compare the mean-variance and the expected utility maximization approaches. Using the embedding technique pioneered by Zhou and Li (2000) we first find the efficient frontier of portfolios in the Black-Scholes financial market. Then, using standard stochastic optimal control we find the optimal portfolios derived via expected utility for popular utility functions. As a main result, we prove that the optimal portfolios derived with the CARA and CRRA utility functions are not mean-variance efficient. As a corollary, we prove that this holds also in the standard portfolio selection problem. We provide a natural measure of inefficiency based on the difference between optimal portfolio variance and minimal variance, and we show its dependence on risk aversion, Sharpe ratio of the risky asset, time horizon, initial wealth and contribution rate. Numerical examples illustrate the extent of inefficiency of CARA and CRRA utility functions in defined contribution pension schemes.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.carloalberto.org/files/no.108.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 108.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 35 pages
Date of creation: 2009
Date of revision: 2009
Handle: RePEc:cca:wpaper:108

Contact details of provider:
Postal: Via Real Collegio, 30, 10024 Moncalieri (To)
Phone: +390116705000
Fax: +390116476847
Email:
Web page: http://www.carloalberto.org/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Giovanni Bert).

Related research
Keywords: Mean-variance approach; efficient frontier; expected utility maximization; defined contribution pension scheme; portfolio selection; risk aversion; Sharpe ratio;

Other versions of this item:

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

This paper has been announced in the following NEP Reports:

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.:
  1. Courty, Pascal & Pagliero, Mario, 2009. "The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry," CEPR Discussion Papers 7120, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Giorgio Bellettini & Filippo Taddei, 2009. "Real Estate Prices and the Importance of Bequest Taxation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Luca Anderlini & Leonardo Felli & Alessandro Riboni, 2008. "Statute Law or Case Law?," Carlo Alberto Notebooks 83, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  4. Giovanni Mastrobuoni & Matthew Weinberg, 2007. "Heterogeneity in Intra-Monthly Consumption Patterns, Self-Control, and Savings at Retirement," Carlo Alberto Notebooks 36, Collegio Carlo Alberto. [Downloadable!]
  5. Luca Flabbi, 2007. "Prejudice and Gender Differentials in the U.S. Labor Market in the Last Twenty Years," Carlo Alberto Notebooks 57, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  6. Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci & Luigi Montrucchio, 2008. "Uncertainty Averse Preferences," Carlo Alberto Notebooks 77, Collegio Carlo Alberto. [Downloadable!]
  7. Elisa Luciano & Wim Schoutens, 2006. "A Multivariate Jump-Driven Financial Asset Model," Carlo Alberto Notebooks 29, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  8. Theodoros M. Diasakos, 2008. "Complexity and Bounded Rationality in Individual Decision Problems," Carlo Alberto Notebooks 90, Collegio Carlo Alberto. [Downloadable!]
  9. Paolo Ghirardato & Fabio Maccheroni & Massimo Marinacci, 2007. "Revealed Ambiguity and Its Consequences: Updating," Carlo Alberto Notebooks 44, Collegio Carlo Alberto. [Downloadable!]
  10. Christine Hauser & Giovanni Mastrobuoni, 2008. "Child Support Enforcement and Children's Consumption," Carlo Alberto Notebooks 99, Collegio Carlo Alberto. [Downloadable!]
  11. Pietro Garibaldi & Lia Pacelli, 2007. "Do Larger Severance Payments Increase Individual Job Duration?," Carlo Alberto Notebooks 39, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  12. Christopher Flinn & James Mabli, 2008. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," Carlo Alberto Notebooks 91, Collegio Carlo Alberto. [Downloadable!]
  13. Mario Pagliero, 2007. "The Impact of Potential Labor Supply on Licensing Exam Difficulty in the US Market for Lawyers," CHILD Working Papers wp19_08, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY. [Downloadable!]
    Other versions:
  14. Roger Lagunoff & Dino Gerardi & Luca Anderlini, 2008. "Communication and Learning," Working Papers gueconwpa~08-08-01, Georgetown University, Department of Economics. [Downloadable!]
    Other versions:
  15. Giovanni Mastrobuoni, 2006. "The Social Security Earnings Test Removal. Money Saved or Money Spent by the Trust Fund?," Carlo Alberto Notebooks 25, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  16. Tito Boeri & Pietro Garibaldi, 2007. "Two Tier Reforms of Employment Protection: a Honeymoon Effect?," Economic Journal, Royal Economic Society, vol. 117(521), pages 357-385, 06. [Downloadable!] (restricted)
    Other versions:
  17. Gani Aldashev & Jean-Marie Baland, 2008. "Awareness and AIDS: A Political Economy Model," Carlo Alberto Notebooks 92, Collegio Carlo Alberto. [Downloadable!]
  18. Árpád Ábrahám & Nicola Pavoni, 2008. "Optimal Income Taxation and Hidden Borrowing and Lending: The First-Order Approach in Two Periods," Carlo Alberto Notebooks 102, Collegio Carlo Alberto. [Downloadable!]
  19. Theodoros Diasakos, 2008. "Comparative Statics of General Equilibrium Asset Prices," Carlo Alberto Notebooks 72, Collegio Carlo Alberto. [Downloadable!]
  20. Alessandro Pavan & Giacomo Calzolari, 2008. "Truthful Revelation Mechanisms for Simultaneous Common Agency Games," Carlo Alberto Notebooks 85, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  21. Elisa Luciano & Patrizia Semeraro, 2008. "A Generalized Normal Mean Variance Mixture for Return Processes in Finance," Carlo Alberto Notebooks 97, Collegio Carlo Alberto, revised 2009. [Downloadable!]
Full references

Statistics
Access and download statistics

Did you know? IDEAS uses the data collected within the RePEc project, the largest online bibliographic database in Economics.

This page was last updated on 2009-11-2.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.