Mean–variance target-based optimisation for defined contribution pension schemes in a stochastic framework

Francesco Menoncin () and Elena Vigna

Insurance: Mathematics and Economics, 2017, vol. 76, issue C, 172-184

Abstract: We solve a mean–variance optimisation problem in the accumulation phase of a defined contribution pension scheme. In a general multi-asset financial market with stochastic investment opportunities and stochastic contributions, we provide the general forms for the efficient frontier, the optimal investment strategy, and the ruin probability. We show that the mean–variance approach is equivalent to a “user-friendly” target-based optimisation problem which minimises a quadratic loss function, and provide implementation guidelines for the selection of the target. We show that the ruin probability can be kept under control through the choice of the target level. We find closed-form solutions for the special case of stochastic interest rate following the Vasiček (1977) dynamics, contributions following a geometric Brownian motion, and market consisting of cash, one bond and one stock. Numerical applications report the behaviour over time of optimal strategies and non-negative constrained strategies.

Keywords: Mean–variance approach; Defined contribution pension scheme; Stochastic optimal control; Martingale method; Efficient frontier; Ruin probability (search for similar items in EconPapers)
JEL-codes: C61 D81 D90 G11 G22 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:76:y:2017:i:c:p:172-184

DOI: 10.1016/j.insmatheco.2017.08.002

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