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Cairns, Andrew J. G.; Blake, David; Dowd, Kevin

Stochastic lifestyling: optimal dynamic asset allocation for defined contribution pension plans. (English) Zbl 1200.91297

J. Econ. Dyn. Control 30, No. 5, 843-877 (2006).
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.

Cited in 1 Review
Cited in 83 Documents

MSC:

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

Keywords:

stochastic control; optimal asset allocation; stochastic lifestyling; utility numeraire; habit formation; non-hedgeable salary risk; HJB equation
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\textit{A. J. G. Cairns} et al., J. Econ. Dyn. Control 30, No. 5, 843--877 (2006; Zbl 1200.91297)
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