Robust portfolio choice for a defined contribution pension plan with stochastic income and interest rate

Jingyun Sun, Yongjun Li and Ling Zhang

Communications in Statistics - Theory and Methods, 2018, vol. 47, issue 17, 4106-4130

Abstract: This paper considers a robust portfolio choice problem for a defined contribution pension plan with stochastic income and stochastic interest rate. The investment objective of the pension plan is to maximize the expected utility of the wealth at the retirement time. We assume that the financial market consists of a stock, a zero-coupon bond and a risk-free asset. And the member of defined contribution pension plan is ambiguity-averse, which means that the member is uncertain about the expected return rate of the bond and stock. Meanwhile, the member's ambiguity-aversion level toward these two financial assets is quite different. The closed-form expressions of the robust optimal investment strategy and the corresponding value function are derived by adopting the stochastic dynamic programming approach. Furthermore, the sensitive analysis of model parameters on the optimal investment strategy are presented. We find that the member's aversion on model ambiguity increases her hedging demand and has remarkable impact on the optimal investment strategy. Moreover, we demonstrate that ignoring model uncertainty will lead to significant utility loss for the ambiguity-averse member, and the model uncertainty about the stock dynamics implies greater effect on the outcome of the investment than the bond.

Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:taf:lstaxx:v:47:y:2018:i:17:p:4106-4130

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DOI: 10.1080/03610926.2017.1367815

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