Optimal Smooth Consumption and Annuity Design
Posted: 9 Dec 2012 Last revised: 21 Mar 2014
Date Written: December 9, 2012
Abstract
We propose an optimization criterion that yields extraordinary consumption smoothing compared to the well known results of the life-cycle model. Under this criterion we solve the related consumption and investment optimization problem faced by individuals with preferences for intertemporal stability in consumption. We find that the consumption and investment patterns demanded under the optimization criterion is in general offered as annuity benefits from products in the class of ‘Formula Based Smoothed Investment-Linked Annuities’.
Keywords: stochastic control, quadratic optimization, linear regulation, consumption smoothing, formula based smoothed investment-linked annuities
JEL Classification: D01, D14, D91, G02, G11, G22
Suggested Citation: Suggested Citation