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Optimal Pension Management under Stochastic Interest Rates, Wages, and Inflation

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Author Info
Paolo BATTOCCHIO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
Francesco MENONCIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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Abstract

We consider a stochastic model for a defined-contribution pension fund in continuous time. In particular, we focus on the portfolio problem of a fund manager who wants to maximize the expected utility of his terminal wealth in a complete financial market with stochastic interest rate. The fund manager must cope with two background risks: the salary risk and the inflation risk. We find a closed form solution for the asset allocation problem and so we are able to analyse in detail the behaviour of the optimal portfolio with respect to salary and inflation. Finally, a numerical simulation is presented.

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Publisher Info
Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2002021.

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Length: 28
Date of creation: 01 Jun 2002
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Handle: RePEc:ctl:louvir:2002021

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Related research
Keywords: defined-contribution pension plan; salary risk; inflation risk; stochastic optimal control; Hamilton-Jacobi-Bellman equation;

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

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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. 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. [Downloadable!] (restricted)
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  3. Menoncin, Francesco, 2002. "Optimal portfolio and background risk: an exact and an approximated solution," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 249-265, October. [Downloadable!] (restricted)
  4. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487. [Downloadable!] (restricted)
  5. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. Lioui, Abraham & Poncet, Patrice, 2001. "On optimal portfolio choice under stochastic interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1841-1865, November. [Downloadable!] (restricted)
  9. Paolo Battocchio & Francesco Menoncin, 2002. "Optimal Portfolio Strategies with Stochastic Wage Income and Inflation: The Case of a Defined Contribution Pension Plan," CeRP Working Papers 19, Center for Research on Pensions and Welfare Policies, Turin (Italy). [Downloadable!]
  10. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(4), pages 573-92. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Francesco, MENONCIN, 2003. "Optimal Real Consumption and Asset Allocation for a HARA Investor with Labour Income," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  2. Paolo, BATTOCCHIO & Francesco, MENONCIN & Olivier, SCAILLET, 2003. "Optimal asset allocation for pension funds under mortality risk during the accumulation and decumulation phases," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2003004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
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  3. ZHANG, AIHUA & Korn, Ralf & Ewald, Christian-Oliver, 2007. "Optimal Management And Inflation Protection For Defined Contribution Pension Plans," MPRA Paper 3300, University Library of Munich, Germany. [Downloadable!]
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