Advances and Applications in Statistics
Volume 8, Issue 2, Pages 247 - 289
(April 2008)
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DYNAMIC HEDGING OF THE MORTALITY RISK VIA A CONTINUOUS CONTROL STRATEGY OF THE PORTFOLIO OF INVESTMENTS OF A PENSION FUND
Alexandros A. Zimbidis (Greece) and Athanasios A. Pantelous (Greece)
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Abstract: In this paper, we propose and model a realistic approach for the management of a defined contribution pension scheme in the distribution phase (post-retirement period) providing a whole life assurance benefit. We assume a stochastic framework for both mortality and investment risk and additionally suggest a correlation effect between the two separate risks. By using the HJB equation, we design a concrete solution with respect to the optimal investment strategy and the optimal rate of death benefit payments. The final formulae, although complicated, provide a deep insight into the mechanisms of the management?s decisions. They also coincide with classical approaches and solutions from the finance field. |
Keywords and phrases: pension fund, whole life assurance, optimal control theory, HJB equation. |
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