Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion

David Blake, Douglas Wright and Yumeng Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: Assuming loss aversion, stochastic investment and labour income processes, and a path-dependent target fund, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven 'threshold' strategy. With this strategy, the equity allocation is increased if the accumulating fund is below target and decreased if it is above. However, if the fund is sufficiently above target, the optimal investment strategy switches discretely to 'portfolio insurance'. We show that under loss aversion, the risk of failing to attain the target replacement ratio is significantly reduced compared with target-driven strategies derived from maximising expected utility.

Keywords: Defined Contribution Pension Plan; Investment Strategy; Loss Aversion; Target Replacement Ratio; Threshold Strategy, Portfolio Insurance, Dynamic Programming (search for similar items in EconPapers)
JEL-codes: C63 D91 G11 G23 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Target-driven investing: Optimal investment strategies in defined contribution pension plans under loss aversion (2013)
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