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Zbl 1200.91297
Cairns, Andrew J.G.; Blake, David; Dowd, Kevin
Stochastic lifestyling: optimal dynamic asset allocation for defined contribution pension plans. (English)
[J] J. Econ. Dyn. Control 30, No. 5, 843-877 (2006). ISSN 0165-1889

Summary: We investigate asset-allocation strategies open to members of defined-contribution pension plans with a model that incorporates asset, salary (labour-income) and interest-rate risk. We propose a novel form of terminal utility function, incorporating habit formation, that uses the member's final salary as a numeraire. The paper discusses various properties and characteristics of the optimal asset-allocation strategy both with and without the presence of non-hedgeable salary risk. Finally, we compare the performance of the optimal strategy with some popular alternatives used by pension providers and we conclude that it significantly enhances the welfare of a wide range of potential plan members relative to these other strategies.

MSC 2000:: *91G50
93E20 Optimal stochastic control (systems)
91B30 Risk theory etc.
91G10

Keywords: stochastic control; optimal asset allocation; stochastic lifestyling; utility numeraire; habit formation; non-hedgeable salary risk; HJB equation

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Zentralblatt MATH Berlin [Germany]