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Target variation in a loss avoiding pension fund problem

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  • Foster, Jarred

Abstract

This study builds on the findings in Krawczyk (2008), where a 'cautious relaxed' utility measure is introduced in the solving of a dynamic portfolio management problem. The new measure provides distributions that are left skewed in contrast to the right skewed distributions previously found. This paper builds on these findings by testing the effect of increasing the client's target and introducing the manager's preferences. It is found that increasing the target causes the distribution to become less left skewed, causing higher probabilities of loss. The pension fund manager considering his own payoff does not significantly affect the results and in some cases improves them.

Suggested Citation

  • Foster, Jarred, 2011. "Target variation in a loss avoiding pension fund problem," MPRA Paper 36177, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36177
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    References listed on IDEAS

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    1. Alistair Windsor & Jacek B. Krawczyk, 1997. "A Matlab Package for Approximating the Solution to a Continuous- Time Stochastic Optimal Control Problem," Computational Economics 9710002, University Library of Munich, Germany.
    2. Yiu, K. F. C., 2004. "Optimal portfolios under a value-at-risk constraint," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1317-1334, April.
    3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    4. Arjan B. Berkelaar & Roy Kouwenberg & Thierry Post, 2004. "Optimal Portfolio Choice under Loss Aversion," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 973-987, November.
    5. Azzato, Jeffrey & Krawczyk, Jacek, 2006. "SOCSol4L An improved MATLAB package for approximating the solution to a continuous-time stochastic optimal control problem," MPRA Paper 1179, University Library of Munich, Germany.
    6. Jacek B. Krawczyk, 2008. "On loss-avoiding payoff distribution in a dynamic portfolio management problem," Journal of Risk Finance, Emerald Group Publishing, vol. 9(2), pages 151-172, February.
    7. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    8. Stanley R. Pliska, 1986. "A Stochastic Calculus Model of Continuous Trading: Optimal Portfolios," Mathematics of Operations Research, INFORMS, vol. 11(2), pages 371-382, May.
    9. Azzato, Jeffrey D. & Krawczyk, Jacek B., 2008. "A parallel Matlab package for approximating the solution to a continuous-time stochastic optimal control problem," MPRA Paper 9993, University Library of Munich, Germany.
    10. Cairns, Andrew, 2000. "Some Notes on the Dynamics and Optimal Control of Stochastic Pension Fund Models in Continuous Time," ASTIN Bulletin, Cambridge University Press, vol. 30(1), pages 19-55, May.
    11. Azzato, Jeffrey & Krawczyk, Jacek B & Sissons, Christopher, 2011. "On loss-avoiding lump-sum pension optimization with contingent targets," Working Paper Series 1532, Victoria University of Wellington, School of Economics and Finance.
    12. Samuelson, Paul A, 1974. "Comments on the Favorable-Bet Theorem," Economic Inquiry, Western Economic Association International, vol. 12(3), pages 345-355, September.
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    Cited by:

    1. Jacek B Krawczyk, 2015. "Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs," Risks, MDPI, vol. 3(3), pages 1-20, August.
    2. Foster, Jarred & Krawczyk, Jacek B, 2013. "Sensitivity of cautious-relaxed investment policies to target variation," Working Paper Series 2972, Victoria University of Wellington, School of Economics and Finance.

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    More about this item

    Keywords

    Loss prevention; Numerical analysis; Optimization techniques; Pension funds; Portfolio investment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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