Optimal management and inflation protection for defined contribution pension plans

Aihua Zhang, Ralf Korn and Christian-Oliver Ewald

MPRA Paper from University Library of Munich, Germany

Abstract: Due to the increasing risk of inflation and diminishing pension benefits, insurance companies have started selling in°ation-linked products. Selling such products the insurance company takes over some or all of the inflation risk from their customers. On the other side financial derivatives which are linked to inflation such as inflation linked bonds are traded on financial markets and appear to be of increasing popularity. The insurance company can use these products to hedge its own inflation risk. In this article we study how to optimally manage a pension fund taking positions in a money market account, a stock and an inflation linked bond, while financing investments through a continuous stochastic income stream such as the plan member's contributions. We use the martingale method in order to compute an analytic expression for the optimal strategy and express it in terms of observable market variables.

Keywords: Pension mathematics; in°ation; long-term investment; stochastic optimal control; martingale method (search for similar items in EconPapers)
JEL-codes: C61 E44 G12 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:3300

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