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Optimal Portfolios In Defined Contribution Pension Systems



    (Escuela de Administración, Pontificia Universidad Católica de Chile)

We study optimal portfolios for defined contribution (possibly mandatory) pension systems, which maximize expected pensions subject to a risk level. By explicitly considering the present value of future individual contributions and changing the risk-return numeraire to future pension units we obtain interesting insights, consistent with the literature, in a simpler context. Results naturally imply that the local indexed (inflation-adjusted) currency is the benchmark and that the investment horizon is long. Optimal portfolios have a hedging component with an even longer duration than a deferred (real) pension, which begins its lifetime payments upon retirement. Results are illustrated with the parameters obtained for the United States by Campbell and Viceira (2001). It also discusses the implications for emerging market reformed pension systems.

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Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 9 (2006)
Issue (Month): 2 ()
Pages: 99-129

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Handle: RePEc:pch:abante:v:9:y:2006:i:2:p:99-129
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  1. Viceira, Luis & Campbell, John, 2001. "Who Should Buy Long-Term Bonds?," Scholarly Articles 3128709, Harvard University Department of Economics.
  2. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  3. Viceira, Luis & Rodriguez, Jorge & Chacko, George & Campbell, John, 2004. "Strategic Asset Allocation in a Continuous-Time VAR Model," Scholarly Articles 3294738, Harvard University Department of Economics.
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