On the Application of Stochastic Optimal Control to Pension Fund Management

Osu, Bright O.; Ijioma, Onwukwe

doi:10.18052/www.scipress.com/BSMaSS.3.54

BSMaSS > BSMaSS Volume 3 > On the Application of Stochastic Optimal Control...

< Back to Volume

On the Application of Stochastic Optimal Control to Pension Fund Management

Full Text PDF

Abstract:

In this paper, we apply the stochastic optimal control theory to the pension fund management before and after retirement in the defined contribution and defined benefit pension schemes, where benefits are paid as investment returns for a period or duration of time. The goal of the management problem is to optimize the long-term growth of expected utility of returns. We consider different types of power law utility function of the form U(X)=γ^-1X^γ, γ<1, γ≠0 to examine the different investment schemes. Our result shows the advantage of the defined contribution scheme over the defined benefit scheme before and after retirement.

Info:

Periodical:

The Bulletin of Society for Mathematical Services and Standards (Volume 3)

Pages:

54-66

DOI:

https://doi.org/10.18052/www.scipress.com/BSMaSS.3.54

Citation:

B. O. Osu and O. Ijioma, "On the Application of Stochastic Optimal Control to Pension Fund Management", The Bulletin of Society for Mathematical Services and Standards, Vol. 3, pp. 54-66, 2012

Online since:

September 2012

Authors:

Bright O. Osu, Onwukwe Ijioma

Keywords:

Defined Benefit, Defined Contribution, Pension Fund Management, Stochastic Optimal Control

Export:

RIS, BibTeX, Text

Distribution:

Open Access

This work is licensed under a
Creative Commons Attribution 4.0 International License

References:

Bjork, T. (1998). Arbitrage Theory in Continuous Time, Oxford University Press.

Blake, D. (1998). Pension scheme as option on pension fund assets: Implications for pension fund management. Insurance: Mathematics and Economics 23, 263-286.

Booth, P., Yakonbov, Y., (2000). Investment for defined contribution pension scheme members close to retirement: An analysis of the life style, concept. North American Actuarial Journal 4(2), 1-19.

Cairns, A.J.G. (2000). Some notes on the dynamics and optimal control of stochastic pension fund models in continuous time, ASTIN Bulletin 30: 19-55.

Constantinides, G. M. (1979). Multiperiod Consumption and Investment Behavior with Convex Transaction Cost . Management Science, 25, 1127- 1137.

Constantinides, G. M. (1986). Capital Market Equilibrium with Transaction Costs. Journal of Political Economy, 94, 842-862.

Fleming, W. H. (1995). Optimal models and risk- sensitive stochastic control. IMA Math. Appl. Vol. 65, 75-88.

Fleming, W. H. and Sheu, S. J. (1999). Optimal long term growth rate of expected utility of wealth. Ann. Appl. Probab. 9, 871-903.

Deelstra, G., Grasselli, M., Koehl, P.F., (2002). Optimal design of the guarantee for defined contribution funds. Journal of Economic Dynamics and Control, Vol. 28, 2239-2260.

Josa-Fombellida, R., Rincon-Zaratero, J.P., (2010). Optimal asset allocation for aggregated defined benefit pension funds with stochastic interest rates. European journal of Operational Research, vol. 201, 211-221.

Lim, Andrew E.B., Wong,B., (2010). A benchmarking approach to the optimal asset allocation for insurers and pension funds. Insurance: Mathematics and Economics, vol. 46, 317-327.

Merton, R.C. (1969). Lifetime portfolio selection under uncertainty: the continuous case. Review of Economics and Statistics 51, 247-257.

Merton, R.C. (1971). Optimal consumption and portfolio rules in a continuous time model. Journal of Economic Theory 3: 373-413.

Osu, B.O. (2011). The price of asset-liability control under tail conditional expectation with no transaction cost. British Journal of Mathematics and Computer Science 1(3): 129-140.

Pierre, D., Manuela, B.P., Immaculada, D.F. (2003). Stochastic optimal control of annuity contracts. Insurance: Mathematics and Economics Vol. 33, 227-238.

Wang, H. and Wang, C(2010). Leverage management. Math. Finan. Econ. 3, 161-183.

Show More Hide

Cited By:

This article has no citations.