Optimal management of DC pension plan in a stochastic interest rate and stochastic volatility framework |
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| Institution: | 1. School of Risk and Actuarial Studies and CEPAR, Australian School of Business, University of New South Wales, Sydney, NSW 2052, Australia;2. Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109, Australia;3. Lingnan (University) College, Sun Yat-sen University, Guangzhou 510275, PR China;1. China Institute for Actuarial Science, Central University of Finance and Economics, Beijing 100081, PR China;2. Lingnan (University) College, Sun Yat-sen University, Guangzhou 510275, PR China;1. Department of Mathematics, School of Science, Tianjin University, Tianjin 300072, PR China;2. Center for Applied Mathematics, Tianjin University, Tianjin 300072, PR China;3. Research Center, Shenzhen Venture Capital Group CO.LTD, Shenzhen 518048, PR China;4. School of Economics and Management, Tsinghua University, Beijing 100084, PR China;1. Center for Financial Engineering and Risk Management, School of Insurance, Guangdong University of Finance, Guangzhou 510521, PR China;2. Guangdong Regional Financial Policy Research Center, Guangdong University of Finance, Guangzhou 510521, PR China;3. School of Finance, Guangdong University of Foreign Studies, Guangzhou 510006, PR China |
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| Abstract: | This paper investigates an optimal investment strategy of DC pension plan in a stochastic interest rate and stochastic volatility framework. We apply an affine model including the Cox–Ingersoll–Ross (CIR) model and the Vasicek mode to characterize the interest rate while the stock price is given by the Heston’s stochastic volatility (SV) model. The pension manager can invest in cash, bond and stock in the financial market. Thus, the wealth of the pension fund is influenced by the financial risks in the market and the stochastic contribution from the fund participant. The goal of the fund manager is, coping with the contribution rate, to maximize the expectation of the constant relative risk aversion (CRRA) utility of the terminal value of the pension fund over a guarantee which serves as an annuity after retirement. We first transform the problem into a single investment problem, then derive an explicit solution via the stochastic programming method. Finally, the numerical analysis is given to show the impact of financial parameters on the optimal strategies. |
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| Keywords: | Defined contribution pension plan CRRA utility Stochastic dynamic programming Stochastic interest rate Stochastic volatility Stochastic contribution rate Minimum guarantee |
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