Optimal dynamic asset allocation for DC plan accumulation/decumulation: Ambition-CVAR

Peter A. Forsyth

Insurance: Mathematics and Economics, 2020, vol. 93, issue C, 230-245

Abstract: We consider the late accumulation stage, followed by the full decumulation stage, of an investor in a defined contribution (DC) pension plan. The investor’s portfolio consists of a stock index and a bond index. As a measure of risk, we use conditional value at risk (CVAR) at the end of the decumulation stage. This is a measure of the risk of depleting the DC plan, which is primarily driven by sequence of return risk and asset allocation during the decumulation stage. As a measure of reward, we use Ambition, which we define to be the probability that the terminal wealth exceeds a specified level. We develop a method for computing the optimal dynamic asset allocation strategy which generates points on the efficient Ambition-CVAR frontier. By examining the Ambition-CVAR efficient frontier, we can determine points that are Median-CVAR optimal. We carry out numerical tests comparing the Median-CVAR optimal strategy to a benchmark constant proportion strategy. For a fixed median value (from the benchmark strategy) we find that the optimal Median-CVAR control significantly improves the CVAR. In addition, the median allocation to stocks at retirement is considerably smaller than the benchmark allocation to stocks.

Keywords: Optimal control; Ambition-CVAR; Asset allocation; DC plan; Resampled backtests (search for similar items in EconPapers)
JEL-codes: G11 G22 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:93:y:2020:i:c:p:230-245

DOI: 10.1016/j.insmatheco.2020.05.005

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