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Optimal investment of DC pension plan under short-selling constraints and portfolio insurance

Yinghui Dong and Harry Zheng

Insurance: Mathematics and Economics, 2019, vol. 85, issue C, 47-59

Abstract: In this paper we investigate an optimal investment problem under short-selling and portfolio insurance constraints faced by a defined contribution pension fund manager who is loss averse. The financial market consists of a cash bond, an indexed bond and a stock. The manager aims to maximize the expected S-shaped utility of the terminal wealth exceeding a minimum guarantee. We apply the dual control method to solve the problem and derive the representations of the optimal wealth process and trading strategies in terms of the dual controlled process and the dual value function. We also perform some numerical tests and show how the S-shaped utility, the short-selling constraints and the portfolio insurance impact the optimal terminal wealth.

Keywords: Short-selling constraints; Loss aversion; Dual control; Inflation risk; Portfolio insurance (search for similar items in EconPapers)
JEL-codes: C61 G11 C20 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.insmatheco.2018.12.005

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