On Using Equities to Produce Pension Payouts

32 Pages Posted: 22 Apr 2020 Last revised: 5 Jan 2021

See all articles by Giovanni Barone-Adesi

Giovanni Barone-Adesi

University of Lugano; Swiss Finance Institute

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Carlo Sala

ESADE Business School

Date Written: December 28, 2020


Is it possible to achieve almost riskless, nonfluctuating investment payoffs in the long run, at a fraction of the traditional funding requirement, using equity investments?
The persistence of low interest rates is spurring research on this question because of the need to increase yields, while limiting the variability of investment results.
Payouts of savings account units aim to achieve an almost riskless outcome over a long horizon.
We show that they can be managed as contingent claims and, when denominated in units of a stock index, less expensively than under classical risk-neutral assumptions.
To assess the robustness of the proposed hedge portfolios, we introduce a simple overfunded scheme and show its reliability using bootstrapping.
The results show that by applying an overfunding of 6%, the probability of not achieving the target is less than 1%.
At the heart of this result are the mean-reversion and the leverage effect of the minimal market model, together with the supermartingale property of the benchmarked savings account.

Keywords: Hedging, target date funds, dynamic investment policies

JEL Classification: G13, G14

Suggested Citation

Barone-Adesi, Giovanni and Platen, Eckhard and Sala, Carlo, On Using Equities to Produce Pension Payouts (December 28, 2020). Swiss Finance Institute Research Paper No. 20-24, Available at SSRN: https://ssrn.com/abstract=3580762 or http://dx.doi.org/10.2139/ssrn.3580762

Giovanni Barone-Adesi (Contact Author)

University of Lugano ( email )

Via Buffi 13
CH-6904 Lugano
+41 58 666 4671 (Phone)
+41 58 666 46 47 (Fax)

Swiss Finance Institute

c/o University of Geneva
40 Bd du Pont-d'Arve
CH-1211 Geneva 4

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

GPO Box 123
Sydney, NSW 2007, 2007
+61 2 9514 7759 (Phone)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
Sydney, New South Wales 2007
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

Carlo Sala

ESADE Business School ( email )

Avenida de Torreblanca 59
Barcelona, Barcelona 08172

HOME PAGE: http://www.people.usi.ch/salaca

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