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Optimal Portfolios In Defined Contribution Pension Systems

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Author Info
EDUARDO WALKER () (Escuela de Administración, Pontificia Universidad Católica de Chile)

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Abstract

We study optimal portfolios for defined contribution (possibly mandatory) pension systems, which maximize expected pensions subject to a risk level. By explicitly considering the present value of future individual contributions and changing the risk-return numeraire to future pension units we obtain interesting insights, consistent with the literature, in a simpler context. Results naturally imply that the local indexed (inflation-adjusted) currency is the benchmark and that the investment horizon is long. Optimal portfolios have a hedging component with an even longer duration than a deferred (real) pension, which begins its lifetime payments upon retirement. Results are illustrated with the parameters obtained for the United States by Campbell and Viceira (2001). It also discusses the implications for emerging market reformed pension systems.

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File URL: http://www.abante.cl/files/ABT/Contenidos/Vol-9-N2/Walker.pdf
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Publisher Info
Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 9 (2006)
Issue (Month): 2 ()
Pages: 99-129
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Handle: RePEc:pch:abante:v:9:y:2006:i:2:p:99-129

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Related research
Keywords: Optimal portfolio Defined contribution Pension reform Deferred pension Emerging markets

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

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    Other versions:
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  9. Campbell, John Y. & Chacko, George & Rodriguez, Jorge & Viceira, Luis M., 2004. "Strategic asset allocation in a continuous-time VAR model," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2195-2214, October. [Downloadable!] (restricted)
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  10. George M. Constantinides, 1984. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Castaneda, Pablo, 2006. "Long Term Risk Assessment in a Defined Contribution Pension System," MPRA Paper 3347, University Library of Munich, Germany, revised 30 Apr 2007. [Downloadable!]
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