Dynamic Optimal Pension Fund Portfolios When Risk Preferences are Heterogeneous Among Pension Participants

27 Pages Posted: 4 Sep 2012

See all articles by Toshiki Honda

Toshiki Honda

Hitotsubashi University - Graduate School of International Corporate Strategy

Date Written: September 2012

Abstract

In this paper, we consider the problem of an optimal pension fund portfolio given the heterogeneous risk preferences of pension fund participants. The relative risk aversion of a pension fund tends to be a decreasing function of the level of aggregate wealth. We find that the dynamic optimal portfolio is simply characterized as the weighted sum of the optimal portfolio for each participant. Our model helps successfully establish the microfoundation of asset liability management models. A numerical example using recent Japanese data indicates the significant total welfare losses of adopting a suboptimal portfolio strategy and an inefficient risk‐sharing rule.

Suggested Citation

Honda, Toshiki, Dynamic Optimal Pension Fund Portfolios When Risk Preferences are Heterogeneous Among Pension Participants (September 2012). International Review of Finance, Vol. 12, Issue 3, pp. 329-355, 2012. Available at SSRN: https://ssrn.com/abstract=2141078 or http://dx.doi.org/10.1111/j.1468-2443.2011.01148.x

Toshiki Honda (Contact Author)

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi, Chiyoda-ku
Tokyo 101-0003, Chiyoda-ku 101-8439
Japan

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