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
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