IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2303.08462.html
   My bibliography  Save this paper

Optimal Investment in Defined Contribution Pension Schemes with Forward Utility Preferences

Author

Listed:
  • Kenneth Tsz Hin Ng
  • Wing Fung Chong

Abstract

Optimal investment strategies of an individual worker during the accumulation phase in the defined contribution pension scheme have been well studied in the literature. Most of them adopted the classical backward model and approach, but any pre-specifications of retirement time, preferences, and market environment models do not often hold in such a prolonged horizon of the pension scheme. Pre-commitment to ensure the time-consistency of an optimal investment strategy derived from the backward model and approach leads the supposedly optimal strategy to be sub-optimal in the actual realizations. This paper revisits the optimal investment problem for the worker during the accumulation phase in the defined contribution pension scheme, via the forward preferences, in which an environment-adapting strategy is able to hold optimality and time-consistency together. Stochastic partial differential equation representation for the worker's forward preferences is illustrated. This paper constructs two of the forward utility preferences and solves the corresponding optimal investment strategies, in the cases of initial power and exponential utility functions.

Suggested Citation

  • Kenneth Tsz Hin Ng & Wing Fung Chong, 2023. "Optimal Investment in Defined Contribution Pension Schemes with Forward Utility Preferences," Papers 2303.08462, arXiv.org, revised Sep 2023.
    • Handle: RePEc:arx:papers:2303.08462
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2303.08462
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Moris S. Strub & Xun Yu Zhou, 2021. "Evolution of the Arrow–Pratt measure of risk-tolerance for predictable forward utility processes," Finance and Stochastics, Springer, vol. 25(2), pages 331-358, April.
    2. Katia Colaneri & Alessandra Cretarola & Benedetta Salterini, 2022. "Optimal investment and reinsurance under exponential forward preferences," Papers 2210.10425, arXiv.org.
    3. Michail Anthropelos & Tianran Geng & Thaleia Zariphopoulou, 2020. "Competition in Fund Management and Forward Relative Performance Criteria," Papers 2011.00838, arXiv.org.
    4. Sigrid Källblad & Jan Obłój & Thaleia Zariphopoulou, 2018. "Dynamically consistent investment under model uncertainty: the robust forward criteria," Finance and Stochastics, Springer, vol. 22(4), pages 879-918, October.
    5. Daniel Lacker & Thaleia Zariphopoulou, 2019. "Mean field and n‐agent games for optimal investment under relative performance criteria," Mathematical Finance, Wiley Blackwell, vol. 29(4), pages 1003-1038, October.
    6. Luo, Shangzhen & Taksar, Michael, 2011. "On absolute ruin minimization under a diffusion approximation model," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 123-133, January.
    7. Cohen, Asaf & Young, Virginia R., 2020. "Rate of convergence of the probability of ruin in the Cramér–Lundberg model to its diffusion approximation," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 333-340.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goncalo dos Reis & Vadim Platonov, 2020. "Forward utility and market adjustments in relative investment-consumption games of many players," Papers 2012.01235, arXiv.org, revised Mar 2022.
    2. Michail Anthropelos & Tianran Geng & Thaleia Zariphopoulou, 2020. "Competition in Fund Management and Forward Relative Performance Criteria," Papers 2011.00838, arXiv.org.
    3. Ludovic Tangpi & Xuchen Zhou, 2022. "Optimal Investment in a Large Population of Competitive and Heterogeneous Agents," Papers 2202.11314, arXiv.org, revised Feb 2023.
    4. Guanxing Fu, 2022. "Mean Field Portfolio Games with Consumption," Papers 2206.05425, arXiv.org, revised Dec 2022.
    5. Jeong Yin Park, 2022. "Optimal portfolio selection of many players under relative performance criteria in the market model with random coefficients," Papers 2209.07411, arXiv.org.
    6. Curatola, Giuliano, 2022. "Price impact, strategic interaction and portfolio choice," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    7. Hansjoerg Albrecher & Pablo Azcue & Nora Muler, 2020. "Optimal ratcheting of dividends in a Brownian risk model," Papers 2012.10632, arXiv.org.
    8. Guanxing Fu, 2023. "Mean field portfolio games with consumption," Mathematics and Financial Economics, Springer, volume 17, number 4, June.
    9. Li-Hsien Sun, 2022. "Mean Field Games with Heterogeneous Groups: Application to Banking Systems," Journal of Optimization Theory and Applications, Springer, vol. 192(1), pages 130-167, January.
    10. Gu Wang & Jiaxuan Ye, 2023. "Fund Managers’ Competition for Investment Flows Based on Relative Performance," Journal of Optimization Theory and Applications, Springer, vol. 198(2), pages 605-643, August.
    11. Guanxing Fu & Xizhi Su & Chao Zhou, 2020. "Mean Field Exponential Utility Game: A Probabilistic Approach," Papers 2006.07684, arXiv.org, revised Jul 2020.
    12. Nicole Bäuerle & Tamara Göll, 2023. "Nash equilibria for relative investors via no-arbitrage arguments," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 97(1), pages 1-23, February.
    13. Chong, Wing Fung, 2019. "Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 93-107.
    14. Qian Lei & Chi Seng Pun, 2021. "Nonlocality, Nonlinearity, and Time Inconsistency in Stochastic Differential Games," Papers 2112.14409, arXiv.org, revised Sep 2023.
    15. Moris S. Strub & Xun Yu Zhou, 2021. "Evolution of the Arrow–Pratt measure of risk-tolerance for predictable forward utility processes," Finance and Stochastics, Springer, vol. 25(2), pages 331-358, April.
    16. Guan, Guohui & Liang, Zongxia & Xia, Yi, 2023. "Optimal management of DC pension fund under the relative performance ratio and VaR constraint," European Journal of Operational Research, Elsevier, vol. 305(2), pages 868-886.
    17. Juan Li & Wenqiang Li & Gechun Liang, 2020. "A game theoretical approach to homothetic robust forward investment performance processes in stochastic factor models," Papers 2005.10660, arXiv.org, revised May 2021.
    18. Zeng, Xudong & Luo, Shangzhen, 2013. "Stochastic Pareto-optimal reinsurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 671-677.
    19. Mark Whitmeyer, 2021. "Submission Fees in Risk-Taking Contests," Papers 2108.13506, arXiv.org.
    20. Gechun Liang & Yifan Sun & Thaleia Zariphopoulou, 2023. "Representation of forward performance criteria with random endowment via FBSDE and application to forward optimized certainty equivalent," Papers 2401.00103, arXiv.org.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2303.08462. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.