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

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Author Info

  • Paolo Battocchio
  • Francesco Menoncin

    (IRES, Université catholique de Louvain)

  • Olivier Scaillet

    (HEC-Université de Geneve and FAME)

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 International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp66.

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Date of creation: Jan 2003
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Handle: RePEc:fam:rpseri:rp66

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Keywords: pension fund; mortality risk; asset allocation;

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References

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  1. 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).
  2. 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.
  3. 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.
  4. 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.
  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. Menoncin, Francesco, 2005. "Cyclical risk exposure of pension funds: A theoretical framework," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 469-484, June.
  2. Luciano, Elisa & Regis, Luca, 2014. "Efficient versus inefficient hedging strategies in the presence of financial and longevity (value at) risk," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 68-77.
  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. Francesco Menoncin & Olivier Scaillet, 2003. "Mortality Risk and Real Optimal Asset Allocation for Pension Funds," FAME Research Paper Series rp101, International Center for Financial Asset Management and Engineering.
  5. 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.

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