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

See all articles by Donatien Hainaut

Donatien Hainaut

Université Catholique de Louvain

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

Hainaut, Donatien, Impulse Control of Pension Fund Contributions, in a Regime Switching Economy (December 11, 2013). Forthcoming in European Journal of Operational Research, Available at SSRN: https://ssrn.com/abstract=2381881 or http://dx.doi.org/10.2139/ssrn.2381881

Donatien Hainaut (Contact Author)

Université Catholique de Louvain ( email )

Voie du Roman Pays 20,
Louvain La Neuve, 1348
Belgium

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