Net Contribution, Liquidity, and Optimal Pension Management
Jounal of Risk and Insurance, Forthcoming
Posted: 25 Aug 2013 Last revised: 25 Nov 2015
Date Written: August 25, 2013
This paper presents an optimal portfolio balancing strategy for a pension fund manager in the presence of fixed and proportional transaction costs for trading stocks and changes in net contribution. An analytic solution to the one-period problem is presented and a heuristic method for a multi-period problem is developed. For reasonably-calibrated parameters, we find that our numerical results explain the actual asset allocation schemes of some internationally-renowned pension funds well. Furthermore, we also find that net contribution and liquidity have significant impacts on the theoretical optimal asset allocation of a pension fund.
Keywords: transaction cost, asset allocation, pension management, net contribution, liquidity
JEL Classification: C61, G11, G23
Suggested Citation: Suggested Citation