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Stochastic lifestyling: optimal dynamic asset allocation for defined contribution pension plans. (English) Zbl 1200.91297
Summary: We investigate asset-allocation strategies open to members of defined-contribution pension plans with a model that incorporates asset, salary (labour-income) and interest-rate risk. We propose a novel form of terminal utility function, incorporating habit formation, that uses the member’s final salary as a numeraire. The paper discusses various properties and characteristics of the optimal asset-allocation strategy both with and without the presence of non-hedgeable salary risk. Finally, we compare the performance of the optimal strategy with some popular alternatives used by pension providers and we conclude that it significantly enhances the welfare of a wide range of potential plan members relative to these other strategies.

91G50 Corporate finance (dividends, real options, etc.)
93E20 Optimal stochastic control
91B30 Risk theory, insurance (MSC2010)
91G10 Portfolio theory
Full Text: DOI
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