Optimal Pension Fund Management with Foreign Investment in a Stochastic Environment

To ensure the success of a pension plan under a self-contained defined contribution (DC) retirement plan, the inclusion of foreign assets in a local pension portfolio could be beneficial for risk diversification and the efficient improvement of a fund’s investment performance during its accumulation...

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Bibliographic Details
Published in:Mathematics (Basel) 2022-07, Vol.10 (14), p.2468
Main Authors: Tang, Mei-Ling, Wu, Ting-Pin, Hung, Ming-Chin
Format: Article
Language:English
Subjects:
Accumulation
Arbitrage
Asset allocation
Criteria
Currency
defined contribution pension plan
Defined contribution plans
dynamic optimization
Dynamic programming
exchange rate risk
Foreign exchange rates
Foreign investment
interest rate risk
Interest rates
International financing
Market equilibrium
Mathematics
Optimization
Pension funds
Pension plans
Portfolio performance
Retirement
Risk
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Summary:To ensure the success of a pension plan under a self-contained defined contribution (DC) retirement plan, the inclusion of foreign assets in a local pension portfolio could be beneficial for risk diversification and the efficient improvement of a fund’s investment performance during its accumulation phase. This study focuses on developing international asset allocation criteria for a DC pension plan; accordingly, we consider risk exposure relative to stochastic interest rates and ex- change rates with minimum guarantees. An arbitrage-free framework, namely, the cross-currency Heath–Jarrow–Morton interest rate model, is introduced in dynamic optimization programming for the DC pension fund. The proposed solution based on the generalized stochastic framework provides tractable and appropriate criteria for the dynamic allocation of a DC pension fund. The constituents of the optimal solution can reflect changes in investment lifecycles and shifts in risk preferences during the accumulation phase of a DC pension plan.
ISSN:2227-7390
2227-7390
DOI:10.3390/math10142468