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

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  • Paolo Battocchio
  • Francesco Menoncin
  • Olivier Scaillet

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 both 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 investment in the risky assets should decrease through time to meet future contractual pension payments while, during the second 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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Bibliographic Info

Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2003-28.

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Date of creation: 2003
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Handle: RePEc:ema:worpap:2003-28

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References

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  1. 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.
  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.
  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.
  4. 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).
  5. 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.
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Cited by:
  1. Francesco Menoncin, 2005. "Cyclical risk exposure of pension funds: a theoretical framework," Working Papers, University of Brescia, Department of Economics ubs0503, University of Brescia, Department of Economics.
  2. Elisa Luciano & Luca Regis, 2013. "Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk," Carlo Alberto Notebooks, Collegio Carlo Alberto 308, Collegio Carlo Alberto.
  3. Marina Di Giacinto & Salvatore Federico & Fausto Gozzi, 2011. "Pension funds with a minimum guarantee: a stochastic control approach," Finance and Stochastics, Springer, vol. 15(2), pages 297-342, June.
  4. 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, Springer, vol. 32(2), pages 113-128, December.
  5. Francesco Menoncin & Olivier Scaillet, 2003. "Mortality Risk and Real Optimal Asset Allocation for Pension Funds," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp101, International Center for Financial Asset Management and Engineering.

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