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Optimal asset allocation for pension funds under mortality risk during the accumulation and decumulation phases

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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))
Olivier, SCAILLET (HEC Geneve and FAME - Geneve)

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Abstract

In a financial market with one riskless asset and n risky assets following geometric Brownian motions, we solve the problem of a pension fund maximizing the expected CRRA utility of its terminal wealth. By considering a stochastic death time for a subscriber, we solve a unique problem for bot accumulation and decumulation phases. We show that the optimal asset allocation during these two phases must be different. In particular, during the first phase, the risky investment should increase through time because of closeness of death time. Our findings also suggest that it is not optimal to manage the two phases separately.

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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 2003004.

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Length: 18
Date of creation: 01 Feb 2003
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Handle: RePEc:ctl:louvir:2003004

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Related research
Keywords: pension funds; mortality risk; asset allocation;

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Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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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. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2001. "Minimization of risks in pension funding by means of contributions and portfolio selection," Insurance: Mathematics and Economics, Elsevier, vol. 29(1), pages 35-45, August. [Downloadable!] (restricted)
  2. 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)
  3. Charupat, Narat & Milevsky, Moshe A., 2002. "Optimal asset allocation in life annuities: a note," Insurance: Mathematics and Economics, Elsevier, vol. 30(2), pages 199-209, April. [Downloadable!] (restricted)
  4. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December. [Downloadable!] (restricted)
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  5. Paolo BATTOCCHIO & Francesco MENONCIN, 2002. "Optimal Pension Management under Stochastic Interest Rates, Wages, and Inflation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
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(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. Katarzyna Romaniuk, 2007. "The optimal asset allocation of the main types of pension funds: a unified framework," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(2), pages 113-128, December. [Downloadable!] (restricted)
  2. Francesco Menoncin, 2005. "Cyclical risk exposure of pension funds: a theoretical framework," Working Papers ubs0503, University of Brescia, Department of Economics. [Downloadable!]
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