Optimal Asset Management for Defined-Contribution Pension Funds with Default Risk

14 Pages Posted: 8 Oct 2016

See all articles by Shibo Bian

Shibo Bian

Shanghai Lixin University of Commerce - School of Accounting and Finance

Jim Cicon

University of Central Missouri

Yi Zhang

Shanghai University

Date Written: October 5, 2016

Abstract

We explore how a defined-contribution pension fund optimally distributes wealth between a defaultable bond, a stock and a bank account, given that a salary is a stochastic process. We assume that the investment objective of the defined-contribution pension fund is to maximize the expected constant relative risk aversion utility of terminal wealth. We thus obtain a closed-form solution to the optimal problem using a martingale approach. We develop numerical simulations, which we graph as illustrations. Finally, we discuss relevant economic insights obtained from our results.

Keywords: defined-contribution pension plan, optimal investment, defaultable bond, stochastic salary, martingale approach

Suggested Citation

Bian, Shibo and Cicon, James and Zhang, Yi, Optimal Asset Management for Defined-Contribution Pension Funds with Default Risk (October 5, 2016). Journal of Risk, Vol. 19, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=2848368

Shibo Bian (Contact Author)

Shanghai Lixin University of Commerce - School of Accounting and Finance ( email )

No.2800,Wenxiang Road,Songjiang District, Shanghai
Shanghai, 201620
China

James Cicon

University of Central Missouri ( email )

Warrensburg, MO 64093-5070
United States

Yi Zhang

Shanghai University ( email )

149 Yanchang Road
SHANGDA ROAD 99
Shanghai 200072, SHANGHAI 200444
China

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