Abstract
In this paper, we study optimal investment, consumption and portfolio choice in a framework where the pension planner member (PPM) embarks on an investment policy to cover up for some certain life targets. The aim of the pension plan manager is to maximize the expectation of total wealth at the time of retirement. The investment return process comprises of risk free asset and two risky assets, and the PPM benefit lies in a complete market that is constrained by the inflation rate. Explicit solutions for constant absolute risk aversion utility functions are obtained and optimal strategies are derived by applying by dynamic programming on the Hamilton-Jacobi-Bellman (HJB) equations. Our numerical results show various effects of some economic parameters on the optimal strategies. The inflation price market risk governs the amount invested in both stock and bond, at the same time varying the premium ratio (η), causes effects on the investment returns. We also investigated the effects of the correlation coefficient (ρ) when set high on consumption rate and income rate. Finally a sensitivity analysis is graphically presented.
Highlights
The research on pension fund has been discussed around 1900s, the likes of [1], have discussed a problem of Defined Contribution (DC) pension fund in the presence of minimum guarantee
This work will follow the same approach as in [22] where their study focused on the proportions to be invested in the stock price and inflation-linked bond, while in this work we put into consideration consumption and income as our additional optimal strategies with more assets
We see that the rate of return in both consumption and income follow a special distribution in statistics and probability namely the beta distribution
Summary
The research on pension fund has been discussed around 1900s, the likes of [1], have discussed a problem of Defined Contribution (DC) pension fund in the presence of minimum guarantee This is where the fund manager invests the initial wealth and the stochastic contribution flow into the financial market. Bruhn [5], approaches the question using a power function and show that the optimal death benefit is related to the wealth of the household In this context, Huang [6] assume a stochastic wage process and a constant relative risk aversion preference. This work will follow the same approach as in [22] where their study focused on the proportions to be invested in the stock price and inflation-linked bond, while in this work we put into consideration consumption and income as our additional optimal strategies with more assets
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
