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Pension fund state estimation and optimal investment strategy

Author

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  • Marek Lešek
  • Miroslav Šimandl

Abstract

A design and utilization of a mathematical model of the contribution defined pension fund is treated. The mathematical model respects the specific character and economical rules of supplementary pension system in the Czech Republic. The state of the new mathematical model is partly immeasurable. The immeasurable part of the state is estimated by the extended Kalman filter. This paper also analyzes the financial risk in the contribution defined pension fund in the Czech Republic. The Bellman's optimality principle is used to derive the best allocation of a pension fund asset in the two-assets world. Principal results concern suitability of the optimal pension fund strategy and large variability of the level of achievement in the pension fund assets in the case of variable rates of assets return. The designed estimator and the best allocation of a pension fund asset are illustrated with real data from a pension fund.

Suggested Citation

  • Marek Lešek & Miroslav Šimandl, 2005. "Pension fund state estimation and optimal investment strategy," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 12(22).
  • Handle: RePEc:czx:journl:v:12:y:2005:i:22:id:141
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    File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/141
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    Keywords

    pension funds; mathematical model; state estimation; extended Kalman filter; Bellman's optimality principle;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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