Optimal management and inflation protection for defined contribution pension plans

Zhang, A., Korn, R. and Ewald, C.-O. (2007) Optimal management and inflation protection for defined contribution pension plans. Blätter der DGVFM, 28(2), pp. 239-258. (doi:10.1007/s11857-007-0019-x)

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Publisher's URL: http://dx.doi.org/10.1007/s11857-007-0019-x

Abstract

Due to the increasing risk of inflation and diminishing pension benefits, insurance companies have started selling inflation-linked products. Selling such products the insurance company takes over some or all of the inflation risk from their customers. On the other side financial derivatives which are linked to inflation such as inflation linked bonds are traded on financial markets and appear to be of increasing popularity. The insurance company can use these products to hedge its own inflation risk. In this article we study how to optimally manage a pension fund taking positions in a money market account, a stock and an inflation linked bond, while financing investments through a continuous stochastic income stream such as the plan member’s contributions. We use the martingale method in order to compute an analytic expression for the optimal strategy and express it in terms of observable market variables.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Ewald, Professor Christian and Zhang, Dr Aihua
Authors: Zhang, A., Korn, R., and Ewald, C.-O.
Subjects:H Social Sciences > HG Finance
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Blätter der DGVFM
Publisher:Springer Berlin / Heidelberg
ISSN:1864-0281

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