Optimal VIX-linked structure for the target benefit pension plan

Lv Chen, Danping Li, Yumin Wang and Xiaobai Zhu

ASTIN Bulletin, 2024, vol. 54, issue 1, 75-93

Abstract: In this paper, we study the optimal VIX-linked target benefit (TB) pension design. By applying the dynamic programming approach, we show the optimal risk-sharing structure for the benefit payment exhibits a linear form that consists of three components: (1) a model-robust performance adjustment, (2) a counter-cyclical volatility adjustment that depends on the VIX index, and (3) a TB level that is partially indexed to the cost-of-living adjustment. Differences between our results and the previous literature are highlighted via both theoretical derivations and numerical illustrations.

Date: 2024
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