Impulse Control of Pension Fund Contributions, in a Regime Switching Economy
Forthcoming in European Journal of Operational Research
18 Pages Posted: 21 Jan 2014 Last revised: 26 Oct 2014
Date Written: December 11, 2013
Abstract
This work proposes a method to optimize the timing of contributions paid by a sponsor to a pension fund, in a regime switching economy. We consider a defined benefit pension plan during the accumulation phase. During this phase, contribution calls occur at discrete times and are converted into assets, after deduction of transaction costs. The dynamics of assets managed by the pension fund is modeled by an exponential switching Brownian motion, able to recreate changes in the economic conjuncture. The approach developed in this work is based on grids, with trinomial links, discretizing the asset return in each economic regime. We also study the impact on the optimal impulse strategy, of liquidity risks and of a delay between contribution calls and the effective purchase of assets.
Keywords: Pension fund, Impulse control, Regime switching, Transaction costs, Liquidity risk
JEL Classification: C5, C6
Suggested Citation: Suggested Citation