Equilibrium investment strategy for DC pension plan with default risk and return of premiums clauses under CEV model

Danping Li, Ximin Rong, Hui Zhao and Bo Yi

Insurance: Mathematics and Economics, 2017, vol. 72, issue C, 6-20

Abstract: This paper considers an optimal investment problem for a defined contribution (DC) pension plan with default risk in a mean–variance framework. In the DC plan, contributions are supposed to be a predetermined amount of money as premiums and the pension funds are allowed to be invested in a financial market which consists of a risk-free asset, a defaultable bond and a risky asset satisfied a constant elasticity of variance (CEV) model. Notice that a part of pension members could die during the accumulation phase, and their premiums should be withdrawn. Thus, we consider the return of premiums clauses by an actuarial method and assume that the surviving members will share the difference between the return and the accumulation equally. Taking account of the pension fund size and the volatility of the accumulation, a mean–variance criterion as the investment objective for the DC plan can be formulated, and the original optimization problem can be decomposed into two sub-problems: a post-default case and a pre-default case. By applying a game theoretic framework, the equilibrium investment strategies and the corresponding equilibrium value functions can be obtained explicitly. Economic interpretations are given in the numerical simulation, which is presented to illustrate our results.

Keywords: DC pension plan; Default risk; Constant elasticity of variance (CEV) model; Mean–variance criterion; Time-consistency (search for similar items in EconPapers)
JEL-codes: C61 G11 G22 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:72:y:2017:i:c:p:6-20

DOI: 10.1016/j.insmatheco.2016.10.007

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