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Optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates

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  • Josa-Fombellida, Ricardo
  • Rincón-Zapatero, Juan Pablo

Abstract

In this paper we study the optimal management of an aggregated pension fund of defined benefit type, in the presence of a stochastic interest rate. We suppose that the sponsor can invest in a savings account, in a risky stock and in a bond with the aim of minimizing deviations of the unfunded actuarial liability from zero along a finite time horizon. We solve the problem by means of optimal stochastic control techniques and analyze the influence on the optimal solution of some of the parameters involved in the model.

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File URL: http://e-archivo.uc3m.es/bitstream/10016/5581/1/Optimal_EJOR_2010_201.pdf
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Bibliographic Info

Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/5581.

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Length: 211–221 p.
Date of creation: 2010
Date of revision:
Publication status: Published in European Journal of Operational Research (2010) v. 201, p.211–221-
Handle: RePEc:ner:carlos:info:hdl:10016/5581

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Web page: http://www.uc3m.es

Related research

Keywords: Pension funds; Stochastic control; Optimal portfolio; Stochastic interest rate;

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  1. Haberman, Steven & Vigna, Elena, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 35-69, August.
  2. Deelstra, Griselda & Grasselli, Martino & Koehl, Pierre-Francois, 2003. "Optimal investment strategies in the presence of a minimum guarantee," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 189-207, August.
  3. Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2004. "Optimal risk management in defined-benefit stochastic pension funds," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5574, Universidad Carlos III de Madrid.
  4. Haberman, Steven & Butt, Zoltan & Megaloudi, Chryssoula, 2000. "Contribution and solvency risk in a defined benefit pension scheme," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 237-259, October.
  5. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin, 2006. "Stochastic lifestyling: Optimal dynamic asset allocation for defined contribution pension plans," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 843-877, May.
  6. Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2008. "Funding and investment decisions in a stochastic defined benefit pension plan with several levels of labor-income earnings," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5578, Universidad Carlos III de Madrid.
  7. 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.
  8. Josa-Fombellida, Ricardo & Rincon-Zapatero, Juan Pablo, 2008. "Mean-variance portfolio and contribution selection in stochastic pension funding," European Journal of Operational Research, Elsevier, vol. 187(1), pages 120-137, May.
  9. 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.
  10. Chang, S. C. & Tzeng, Larry Y. & Miao, Jerry C. Y., 2003. "Pension funding incorporating downside risks," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 217-228, April.
  11. Chang, Shih-Chieh, 1999. "Optimal pension funding through dynamic simulations: the case of Taiwan public employees retirement system," Insurance: Mathematics and Economics, Elsevier, vol. 24(3), pages 187-199, May.
  12. Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2006. "Optimal investment decisions with a liability: the case of defined benefit pension plans," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/5572, Universidad Carlos III de Madrid.
  13. Griselda Deelstra & Martino Grasselli & Pierre-François Koehl, 2003. "Optimal investment strategies in the presence of a minimum guarantee," ULB Institutional Repository 2013/7598, ULB -- Universite Libre de Bruxelles.
  14. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
  15. Menoncin, Francesco, 2005. "Cyclical risk exposure of pension funds: A theoretical framework," Insurance: Mathematics and Economics, Elsevier, vol. 36(3), pages 469-484, June.
  16. Steven Haberman & Elena Vigna, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," ICER Working Papers - Applied Mathematics Series 09-2002, ICER - International Centre for Economic Research.
  17. Boulier, Jean-Francois & Huang, ShaoJuan & Taillard, Gregory, 2001. "Optimal management under stochastic interest rates: the case of a protected defined contribution pension fund," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 173-189, April.
  18. Battocchio, Paolo & Menoncin, Francesco, 2004. "Optimal pension management in a stochastic framework," Insurance: Mathematics and Economics, Elsevier, vol. 34(1), pages 79-95, February.
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