Mean–variance efficiency of DC pension plan under stochastic interest rate and mean-reverting returns

Guohui Guan and Zongxia Liang

Insurance: Mathematics and Economics, 2015, vol. 61, issue C, 99-109

Abstract: This paper studies the optimization problem of DC pension plan under mean–variance criterion. The financial market consists of cash, bond and stock. Similar to Guan and Liang (2014), we assume that the instantaneous interest rate is an affine process including the Cox–Ingersoll–Ross (CIR) model and Vasicek model. However, we assume that the expected return of the stock follows a completely different mean-reverting process, which can well display the bear and bull features of the market, and the market price of the stock index is the Ornstein–Uhlenbeck process. The pension manager thus has to undertake the risks of interest rate and market price of stock index. Besides, a special stochastic contribution rate is formulated. The goal of the pension manager is to maximize the expected terminal value and minimize the variance of terminal value. We will use the technique developed by Guan and Liang (2014) to tackle this problem and derive the closed-forms of efficient frontier and strategies. Numerical analysis is given in the end of this paper to show the economic behavior of the efficient frontier and strategies.

Keywords: IB13; IE12; IE13; IE43; Defined contribution pension plan; Stochastic interest rate; Mean-reverting returns; Stochastic market price of risk; Mean–variance efficiency; Stochastic dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 G11 G32 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:61:y:2015:i:c:p:99-109

DOI: 10.1016/j.insmatheco.2014.12.006

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