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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). .

Suggested Citation

  • Pablo Castañeda & Heinz Rudolph, 2010. "Portfolio Choice, Minimum Return Guarantees, and Competition in DC Pension Systems," Working Papers 39, Superintendencia de Pensiones, revised Feb 2010.
  • Handle: RePEc:sdp:sdpwps:39

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    References listed on IDEAS

    1. 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.
    2. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    3. Jérôme B. Detemple & René Garcia & Marcel Rindisbacher, 2003. "A Monte Carlo Method for Optimal Portfolios," Journal of Finance, American Finance Association, vol. 58(1), pages 401-446, February.
    4. Eckhard Platen, 2005. "On The Role Of The Growth Optimal Portfolio In Finance," Australian Economic Papers, Wiley Blackwell, vol. 44(4), pages 365-388, December.
    5. 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.
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    Cited by:

    1. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2009. "The long and the short of emerging market debt," Policy Research Working Paper Series 5056, The World Bank.
    2. Rudolph, Heinz P. & Holtzer, Peter, 2010. "Challenges of the mandatory funded pension system in the Russian Federation," Policy Research Working Paper Series 5514, The World Bank.
    3. Morales, Alvaro Pedraza, 2014. "Strategic interactions and portfolio choice in money management : evidence from Colombian pension funds," Policy Research Working Paper Series 6994, The World Bank.


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