Minimum return guarantees, investment caps, and investment flexibility

Antje Mahayni () and Judith C. Schneider ()
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Antje Mahayni: University of Duisburg-Essen
Judith C. Schneider: University of Muenster

Review of Derivatives Research, 2016, vol. 19, issue 2, No 1, 85-111

Abstract: Abstract We study the merits of capped retirement products with guarantee for investors who have the flexibility to dynamically adjust their investment strategy. All contracts under consideration are fairly priced such that the net profit of the provider is zero. Without the rider, an expected utility maximizing CRRA investor does not want an investment cap. Here, she commits herself to a strategy a priori. With the flexibility rider, the optimization problem changes and the optimal strategy is a response to an exogenously set price. A fair pricing then anticipates the optimal response of the investor. We show that the maximum expected utility of the investor can, for anticipated fairly priced products, be obtained for a finite cap. Thus, a capped product design can give a Pareto improvement to the otherwise uncapped contract version.

Keywords: Minimum return guarantees; Investment caps; Investment flexibility; Pareto efficient contract design (search for similar items in EconPapers)
JEL-codes: G11 G22 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11147-015-9116-5

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