When Do Derivatives Add Value in Pension Fund Asset Allocation?

Posted: 29 May 2013

See all articles by Jiajia Cui

Jiajia Cui

Algemene Pensioen Groep (APG); University of Amsterdam

Bart Oldenkamp

Cardano Risk Management

Michel Vellekoop

University of Twente - Department of Applied Mathematics

Date Written: May 28, 2013

Abstract

Recent surveys indicate that many pension-fund participants aim for higher retirement income security. We investigate the added value of including derivatives in the portfolio of pension funds to achieve this goal. To do so, we define preferences that incorporate specific features of pension funds, but we also report performance among several key criteria used in practice. Furthermore, we model explicitly that the equity market exhibits both jump risk and volatility risk. Our results show that even relatively small investments in derivatives can achieve improvements in certainty equivalent rates of return and other important performance measures. This confirms the intuition that the use of derivatives allows pension investors to make explicit risk and return tradeoffs and diversify between diffusion risk, jump risk, and volatility risk.

Keywords: Derivatives, Optimal Portfolio Choice, Pension Fund, Stochastic Volatility and Jump Risks

Suggested Citation

Cui, Jiajia and Cui, Jiajia and Oldenkamp, Bart and Vellekoop, Michel, When Do Derivatives Add Value in Pension Fund Asset Allocation? (May 28, 2013). Rotman International Journal of Pension Management, Vol. 6, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=2271197

Jiajia Cui

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Bart Oldenkamp

Cardano Risk Management ( email )

Rotterdam 3011 AA
Netherlands

Michel Vellekoop (Contact Author)

University of Twente - Department of Applied Mathematics ( email )

P.O. Box 217
7500 AE Enschede
Netherlands

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