Optimal management and inflation protection for defined contribution pension plans
AbstractDue to the increasing risk of inflation and diminishing pension benefits, insurance companies have started selling in°ation-linked products. Selling such products the insurance company takes over some or all of the inflation risk from their customers. On the other side financial derivatives which are linked to inflation such as inflation linked bonds are traded on financial markets and appear to be of increasing popularity. The insurance company can use these products to hedge its own inflation risk. In this article we study how to optimally manage a pension fund taking positions in a money market account, a stock and an inflation linked bond, while financing investments through a continuous stochastic income stream such as the plan member's contributions. We use the martingale method in order to compute an analytic expression for the optimal strategy and express it in terms of observable market variables.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 3300.
Date of creation: 2007
Date of revision:
Pension mathematics; in°ation; long-term investment; stochastic optimal control; martingale method;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-26 (All new papers)
- NEP-IAS-2007-05-26 (Insurance Economics)
- NEP-MAC-2007-05-26 (Macroeconomics)
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