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

Bruhn, Kenneth and Steffensen, Mogens, Optimal Smooth Consumption and Annuity Design (December 9, 2012). Journal of Banking and Finance, Vol. 37, No. 8, 2013, Available at SSRN: https://ssrn.com/abstract=2187039 or http://dx.doi.org/10.2139/ssrn.2187039

Kenneth Bruhn (Contact Author)

Edlund A/S ( email )

La Cours Vej 7
Frederiksberg, DK-2000
Denmark

Mogens Steffensen

University of Copenhagen ( email )

Universitetsparken 5
DK-2100 Copenhagen
Denmark

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