The Equity Risk Premium and Pension Ambition: The Effect of Parameter Uncertainty

40 Pages Posted: 26 Mar 2014

See all articles by Alexander de Roode

Alexander de Roode

Robeco Asset Management, Quantitative Investment Research; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2014

Abstract

We model uncertainty of financial parameters and examine its impact on the replacement rate in a DC pension contract. To this end, we develop a novel Bayesian framework that reveals substantial reduction in the lower percentiles for the replacement rate at retirement. We identify that the key factor driving our results is the uncertainty of the equity risk premium. Our model shows that a time-varying contribution scheme based on observed interest rates and previous equity return can partially compensate for the effect of parameter uncertainty.

Keywords: Pension contracts, model uncertainty, equity risk premium

JEL Classification: D91, H55

Suggested Citation

de Roode, Alexander, The Equity Risk Premium and Pension Ambition: The Effect of Parameter Uncertainty (March 14, 2014). Available at SSRN: https://ssrn.com/abstract=2414407 or http://dx.doi.org/10.2139/ssrn.2414407

Alexander De Roode (Contact Author)

Robeco Asset Management, Quantitative Investment Research ( email )

Rotterdam, 3011 AG
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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