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Portfolio Choice, Minimum Return Guarantees, and Competition in DC Pension Systems

  • Pablo Castañeda
  • Heinz Rudolph

    ()

    (Studies Division, Chilean Pension Supervisor)

Regulation in countries that have adopted de…ned contribution (DC) pension systems based on savings accounts typically includes minimum return guarantees (MRG) provisions to limit the risk of …nancial downturns. This paper studies the consequences of this regulation over asset allocation within a standard model of dynamic portfolio selection, where managers act strategically while making their investment decisions as in (Basak and Makarov, 2008, Strategic Asset Allocation with Relative Performance Concerns. Working Paper. London Business School). We study a standard dynamic portfolio choice problem in a setting that includes two new ingredients: strategic interaction among portfolio managers and the presence of a MRG. The (pure strategy Nash) equilibrium portfolios are provided in closed-form in the Black and Scholes setting. They are shown to be weighted averages of investment rules that are themselves optimal in scenarios that may become optimal once the uncertainty has resolved. Our results also suggest that MRG rules that rely on index-based benchmark portfolios (as opposed to peer-group ones) may help to mitigate some of the problems that arise when portfolio managers are too prone to relative performance concerns (i.e., the selection of myopic portfolios). .

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File URL: http://www.spensiones.cl/redirect/files/doctrab/DT00039.pdf
File Function: Revised version, 2010
Download Restriction: no

Paper provided by Superintendencia de Pensiones in its series Working Papers with number 39.

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Date of creation: Feb 2010
Date of revision: Feb 2010
Handle: RePEc:sdp:sdpwps:39
Contact details of provider: Web page: http://www.spensiones.cl/
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  1. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, March.
  2. Detemple, Jérôme & Garcia, René & Rindisbacher, Marcel, 2005. "Intertemporal asset allocation: A comparison of methods," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2821-2848, November.
  3. Suleyman Basak & Anna Pavlova & Alexander Shapiro, 2007. "Optimal Asset Allocation and Risk Shifting in Money Management," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1583-1621, 2007 21.
  4. Eckhard Platen, 2005. "On the Role of the Growth Optimal Portfolio in Finance," Research Paper Series 144, Quantitative Finance Research Centre, University of Technology, Sydney.
  5. Jérôme B. Detemple & René Garcia & Marcel Rindisbacher, 2000. "A Monte-Carlo Method for Optimal Portfolios," CIRANO Working Papers 2000s-05, CIRANO.
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