Dynamic Portfolio Choice with Annuities When the Interest Rate Is Stochastic

35 Pages Posted: 6 Sep 2019 Last revised: 21 Nov 2019

See all articles by Yannick Dillschneider

Yannick Dillschneider

Goethe University Frankfurt - Department of Finance

Raimond Maurer

Goethe University Frankfurt - Finance Department

Peter Schober

Goethe University Frankfurt - Department of Finance

Date Written: November 20, 2019

Abstract

This paper studies the optimal life cycle consumption and portfolio choice problem taking into account annuity risk due to stochastic interest rates. When the purchase of annuities is restricted to the retirement date, the annuitant is exposed to the risk of meeting low interest rates at the purchase date. This annuity risk can be diversified by spreading annuity purchases over the whole pre-retirement period. The numerical results of our life cycle model show that such temporal diversification enhances welfare for retirees up to 9% of certainty equivalent consumption and that welfare gains increase with higher interest rate risk.

Keywords: annuity risk, deferred life annuities, dynamic portfolio choice, interest rate risk

JEL Classification: D15, G00, G11, J26

Suggested Citation

Dillschneider, Yannick and Maurer, Raimond and Schober, Peter, Dynamic Portfolio Choice with Annuities When the Interest Rate Is Stochastic (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3445269 or http://dx.doi.org/10.2139/ssrn.3445269

Yannick Dillschneider

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60629
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Peter Schober (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno Platz 3
Frankfurt am Main, Hessen 60323
Germany

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