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

The School of Accounting and Finance, Shanghai Lixin University of Commerce

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)

The School of Accounting and Finance, Shanghai Lixin University of Commerce ( 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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