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