Investment Strategies in the Funded Pillar of the Slovak Pension System

We present a dynamic model for optimal investment decisions in privately managed defined contribution (DC) pension plans. Stock prices are assumed to be driven by the geometric Brownian motion. Interest rates are modelled by means of the Cox-Ingersoll-Ross model (CIR). The model determines an optima...

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Bibliographic Details
Published in:Ekonomický časopis 2015, Vol.63 (2), p.133-151
Main Authors: Melicherčík, Igor, Szucs , Gabor, Zetek, Pavel
Format: Article
Language:English
Subjects:
Economy
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Summary:We present a dynamic model for optimal investment decisions in privately managed defined contribution (DC) pension plans. Stock prices are assumed to be driven by the geometric Brownian motion. Interest rates are modelled by means of the Cox-Ingersoll-Ross model (CIR). The model determines an optimal fraction of pensioner’s savings (in time) to be in-vested in an equity fund, with the rest invested in a bond fund. Next, we present sensitivity analysis with respect to various relevant parameters. We also perform stress-testing of optimal investment decisions under different equity return scenarios. The entire analysis is carried out on the actual Slovak DC scheme and all model parameters are calibrated by the latest available data.
ISSN:0013-3035