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Optimal investment strategies and risk measures in defined contribution pension schemes

  • Steven Haberman
  • Elena Vigna
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    In this paper, we analyse the investment allocation and the downside risk faced by the retiring member of a defined contribution pension scheme, where optimal investment strategies (derived from a dynamic programming approach) have been adopted. The behaviour of the optimal investment strategy is analysed when changing the disutility function and the correlation between the assets. Three different risk measures are considered in analysing the final net replacement ratios achieved by the member: the probability of failing the target, the mean shortfall and a Value at Risk type measure. The replacement ratios encompass the financial and annuitization risks faced by the retiree. We consider the relationship between the risk aversion of the member and these different risk measures in order to understand better the choices confronting different categories of scheme member. We consider the case of a 2 assets portfolio, where the asset returns are correlated and consider the sensitivity of the results to the level of the correlation coefficient.

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    File URL: http://servizi.sme.unito.it/icer_repec/RePEc/icr/wp2002/vigna09-02.pdf
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    Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 09-2002.

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    Length: 40 pages
    Date of creation: Feb 2002
    Date of revision:
    Handle: RePEc:icr:wpmath:09-2002
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    1. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer, vol. 23(1), pages 53-74.
    2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    3. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2001. "Pensionmetrics: stochastic pension plan design and value-at-risk during the accumulation phase," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 187-215, October.
    4. Vigna, Elena & Haberman, Steven, 2001. "Optimal investment strategy for defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 233-262, April.
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