Optimal Asset Allocation for Pension Funds Under Mortality Risk During the Accumulation and Decumulation Phases

FAME Research Paper No. 66

32 Pages Posted: 30 May 2003

See all articles by Paolo Battocchio

Paolo Battocchio

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES)

Francesco Menoncin

University of Brescia - Department of Economics

O. Scaillet

Swiss Finance Institute - University of Geneva

Abstract

In a financial market with one riskless asset and n risky assets following geometric Brownian motions, we solve the problem of a pension fund maximizing the expected CRRA utility of its terminal wealth. By considering a stochastic death time for a subscriber, we solve a unique problem for both accumulation and decumulation phases. We show that the optimal asset allocation during these two phases must be different. In particular, during the first phase the investment in the risky assets should decrease through time to meet future contractual pension payments while, during the second phase, the risky investment should increase through time because of closeness of death time. Our findings also suggest that it is not optimal to manage the two phases separately.

Keywords: pension fund, mortality risk, asset allocation

JEL Classification: G23, G11

Suggested Citation

Battocchio, Paolo and Menoncin, Francesco and Scaillet, Olivier, Optimal Asset Allocation for Pension Funds Under Mortality Risk During the Accumulation and Decumulation Phases. FAME Research Paper No. 66, Available at SSRN: https://ssrn.com/abstract=380461 or http://dx.doi.org/10.2139/ssrn.380461

Paolo Battocchio (Contact Author)

Catholic University of Louvain (UCL) - Institut de Recherches Economiques et Sociales (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

Francesco Menoncin

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy
0039-0302988806 (Phone)
0039-0302988837 (Fax)

HOME PAGE: http://www.eco.unibs.it/~menoncin/

Olivier Scaillet

Swiss Finance Institute - University of Geneva ( email )

Geneva
Switzerland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
502
Abstract Views
3,266
Rank
103,489
PlumX Metrics