Portfolio Choice, Minimum Return Guarantees, and Competition in DC Pension Systems
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). .
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Basak, Suleyman & Pavlova, Anna & Shapiro, Alex, 2006. "Optimal Asset Allocation and Risk Shifting in Money Management," CEPR Discussion Papers 5524, C.E.P.R. Discussion Papers.
- 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, 02.
- Jérôme B. Detemple & René Garcia & Marcel Rindisbacher, 2000. "A Monte-Carlo Method for Optimal Portfolios," CIRANO Working Papers 2000s-05, CIRANO.
- 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.
- Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
- 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. Full references (including those not matched with items on IDEAS)