Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099997 | Journal of Economic Dynamics and Control | 2006 | 35 Pages |
Abstract
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Andrew J.G. Cairns, David Blake, Kevin Dowd,