Optimal timing for annuitization, based on jump diffusion fund and stochastic mortality

Donatien Hainaut and Griselda Deelstra

Journal of Economic Dynamics and Control, 2014, vol. 44, issue C, 124-146

Abstract: Optimal timing for annuitization is developed along three approaches. Firstly, the mutual fund in which the individual invests before annuitization is modeled by a jump diffusion process. Secondly, instead of maximizing an economic utility, the stopping time is used to maximize the market value of future cash-flows. Thirdly, a solution is proposed in terms of Expected Present Value operators: this shows that the non-annuitization (or continuation) region is either delimited by a lower or upper boundary, in the domain time-assets return. The necessary conditions are given under which these mutually exclusive boundaries exist. Further, a method is proposed to compute the probability of annuitization. Finally, a case study is presented where the mutual fund is fitted to the S&P500 and mortality is modeled by a Gompertz Makeham law with several real scenarios being discussed.

Keywords: Annuity puzzle; Hitting time; Wiener–Hopf factorization; Expected present value (search for similar items in EconPapers)
JEL-codes: G11 J26 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:44:y:2014:i:c:p:124-146

DOI: 10.1016/j.jedc.2014.04.008

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