Mean-variance target-based optimisation in DC plan with stochastic interest rate

Francesco Menoncin () and Elena Vigna

No 337, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We solve a mean-variance optimisation problem of a defined contribution pension scheme in the accumulation phase. The financial market consists of: (i) the risk-free asset, (ii) a risky asset following a GBM, and (iii) a bond driven by a stochastic interest rate following the Vasicek [1977] dynamics. We find a closed-form solution for both the optimal investment strategy and the portfolio efficient frontier. We show that the mean-variance approach is equivalent to a “user-friendly” target-based approach optimisation problem which minimises a quadratic loss function. We show that the ruin probability can be kept under control through the choice of the target level. Numerical applications show that the proportions of bond and risky asset decrease when retirement approaches.

Keywords: Mean-variance approach; efficient frontier; stochastic interest rate; defined contribution pension scheme; portfolio selection; risk aversion; ruin probability (search for similar items in EconPapers)
JEL-codes: C61 D81 D90 G11 G22 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:337

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