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Target variation in a loss avoiding pension fund problem

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  • Foster, Jarred
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    Abstract

    This study builds on the findings in Krawczyk (2008), where a 'cautious relaxed' utility measure is introduced in the solving of a dynamic portfolio management problem. The new measure provides distributions that are left skewed in contrast to the right skewed distributions previously found. This paper builds on these findings by testing the effect of increasing the client's target and introducing the manager's preferences. It is found that increasing the target causes the distribution to become less left skewed, causing higher probabilities of loss. The pension fund manager considering his own payoff does not significantly affect the results and in some cases improves them.

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    File URL: http://mpra.ub.uni-muenchen.de/36177/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36177.

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    Date of creation: Nov 2011
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    Handle: RePEc:pra:mprapa:36177

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    Related research

    Keywords: Loss prevention; Numerical analysis; Optimization techniques; Pension funds; Portfolio investment;

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    1. Alistair Windsor & Jacek B. Krawczyk, 1997. "A Matlab Package for Approximating the Solution to a Continuous- Time Stochastic Optimal Control Problem," Computational Economics, EconWPA 9710002, EconWPA.
    2. Samuelson, Paul A, 1974. "Comments on the Favorable-Bet Theorem," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 12(3), pages 345-55, September.
    3. Arjan B. Berkelaar & Roy Kouwenberg & Thierry Post, 2004. "Optimal Portfolio Choice under Loss Aversion," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 973-987, November.
    4. Azzato, Jeffrey D. & Krawczyk, Jacek B., 2008. "A parallel Matlab package for approximating the solution to a continuous-time stochastic optimal control problem," MPRA Paper 9993, University Library of Munich, Germany.
    5. K.K. Thampi & M.J. Jacob, 2008. "On loss-avoiding payoff distribution in a dynamic portfolio management problem," Journal of Risk Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 9(2), pages 151-172, March.
    6. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
    7. Azzato, Jeffrey & Krawczyk, Jacek, 2006. "SOCSol4L An improved MATLAB package for approximating the solution to a continuous-time stochastic optimal control problem," MPRA Paper 1179, University Library of Munich, Germany.
    8. Azzato, Jeffrey & Krawczyk, Jacek B & Sissons, Christopher, 2011. "On loss-avoiding lump-sum pension optimization with contingent targets," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1532, Victoria University of Wellington, School of Economics and Finance.
    9. Yiu, K. F. C., 2004. "Optimal portfolios under a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(7), pages 1317-1334, April.
    10. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
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