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Longevity Risk Management for Individual Investors

In: Stochastic Programming Applications in Finance, Energy, Planning and Logistics

Author

Listed:
  • Woo Chang Kim

    (KAIST, Daejeon, South Korea)

  • John M. Mulvey

    (Princeton University, Princeton, NJ, USA)

  • Koray D. Simsek

    (Sabanci University, Istanbul, Turkey)

  • Min Jeong Kim

    (KAIST, Daejeon, South Korea)

Abstract

We model and numerically solve the optimal asset allocation problem of a retired couple with uncertain lifetime, in the presence of a life insurance policy. The couple maximizes expected utility over their joint lifetime by dynamically adjusting their asset allocation and purchasing term-life insurance. We conduct three numerical analyses: In the base case, we find optimal policies assuming the expected lifetimes are correct. The other two examples introduce longevity risk through either a shift in the expected lifetimes or an unexpected cut in retirement income. We find that optimal asset allocation policy depends on the presence and the type of these risks as well as the relative price of insurance. Furthermore, we show that a generalized linear policy is not likely to help under such circumstances.

Suggested Citation

  • Woo Chang Kim & John M. Mulvey & Koray D. Simsek & Min Jeong Kim, 2013. "Longevity Risk Management for Individual Investors," World Scientific Book Chapters, in: Horand I Gassmann & William T Ziemba (ed.), Stochastic Programming Applications in Finance, Energy, Planning and Logistics, chapter 2, pages 9-41, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407519_0002
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    Cited by:

    1. Monia Castellini & Caterina Ferrario & Vincenzo Riso, 2021. "From New Public Management to Public Risk Management: An overview of Italian municipalities," Working Papers 20210310, University of Ferrara, Department of Economics.
    2. Akira Nishimura, 2016. "Foreign Exchange Risk and Profit Improvement in the Comprehensive Profit Opportunity and Lost Opportunity Control Model," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(4), pages 1-1, March.

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