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Blätter der DGVFM

, Volume 28, Issue 2, pp 239–258 | Cite as

Optimal management and inflation protection for defined contribution pension plans

  • Aihua Zhang
  • Ralf Korn
  • Christian-Oliver Ewald
Original Research Paper

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.

Keywords

Pension Fund Pension Plan Geometric Brownian Motion Constant Relative Risk Aversion Fisher Equation 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Zusammenfassung

Es wird das Portfolioproblem eines Pensionsfonds betrachtet, wenn zusätzlich zum Investment in Geldmarktkonto und Aktien auch der Handel eines Inflationsbonds möglich und gleichzeitig ein stetiges Prämieneinkommen („Defined contribution“) durch Zahlungen der Mitglieder vorhanden ist. Zur Lösung des Problems wird die sogenannte Martingalmethode verwendet.

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Copyright information

© DAV / DGVFM 2007

Authors and Affiliations

  • Aihua Zhang
    • 1
  • Ralf Korn
    • 1
  • Christian-Oliver Ewald
    • 2
  1. 1.KaiserslauternGermany
  2. 2.St. AndrewsUK

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