Optimal investment strategies and risk measures in defined contribution pension schemes

Steven Haberman and Elena Vigna

ICER Working Papers - Applied Mathematics Series from ICER - International Centre for Economic Research

Abstract: In this paper, we analyse the investment allocation and the downside risk faced by the retiring member of a defined contribution pension scheme, where optimal investment strategies (derived from a dynamic programming approach) have been adopted. The behaviour of the optimal investment strategy is analysed when changing the disutility function and the correlation between the assets. Three different risk measures are considered in analysing the final net replacement ratios achieved by the member: the probability of failing the target, the mean shortfall and a Value at Risk type measure. The replacement ratios encompass the financial and annuitization risks faced by the retiree. We consider the relationship between the risk aversion of the member and these different risk measures in order to understand better the choices confronting different categories of scheme member. We consider the case of a 2 assets portfolio, where the asset returns are correlated and consider the sensitivity of the results to the level of the correlation coefficient.

Keywords: defined contribution pension scheme; optimal investment; downside risk (search for similar items in EconPapers)
Pages: 40 pages
Date: 2002-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (62)

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