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Optimal VIX-linked structure for the target benefit pension plan

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  • Chen, Lv
  • Li, Danping
  • Wang, Yumin
  • Zhu, Xiaobai

Abstract

In this paper, we study the optimal VIX-linked target benefit (TB) pension design. By applying the dynamic programming approach, we show the optimal risk-sharing structure for the benefit payment exhibits a linear form that consists of three components: (1) a model-robust performance adjustment, (2) a counter-cyclical volatility adjustment that depends on the VIX index, and (3) a TB level that is partially indexed to the cost-of-living adjustment. Differences between our results and the previous literature are highlighted via both theoretical derivations and numerical illustrations.

Suggested Citation

  • Chen, Lv & Li, Danping & Wang, Yumin & Zhu, Xiaobai, 2024. "Optimal VIX-linked structure for the target benefit pension plan," ASTIN Bulletin, Cambridge University Press, vol. 54(1), pages 75-93, January.
    • Handle: RePEc:cup:astinb:v:54:y:2024:i:1:p:75-93_4
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