Stochastic pension funding when the benefit and the risky asset follow jump diffusion processes

Ricardo Josa-Fombellida and Juan Pablo Rincón-Zapatero

European Journal of Operational Research, 2012, vol. 220, issue 2, 404-413

Abstract: We study the asset allocation of defined benefit pension plans of the type designed and sponsored by firms with the aim of providing a lifetime pension to the employees at the age of retirement. Benefits are stochastic, combining Poisson jumps with Brownian uncertainty. The sponsor dynamically forms portfolios where the risky asset is also subjected to Poisson jumps and Brownian uncertainty, possibly correlated with the evolution of benefits. The objective is to assure future benefits, while controlling the contribution made to the fund reserves. The problem is solved analytically using dynamic programming techniques.

Keywords: Optimization in financial mathematics; Pension funding; Stochastic control; Poisson process (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:220:y:2012:i:2:p:404-413

DOI: 10.1016/j.ejor.2012.01.033

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