Optimal Investment in Defined Contribution Pension Schemes with Forward Utility Preferences

Kenneth Tsz Hin Ng, Wing Fung Chong

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

Optimal investment strategies of an individual worker during the accumulation phase in the defined contribution pension scheme have been well studied in the literature. Most of them adopted the classical backward model and approach, but any pre-specifications of retirement time, preferences, and market environment models do not often hold in such a prolonged horizon of the pension scheme. Pre-commitment to ensure the time-consistency of an optimal investment strategy derived from the backward model and approach leads the supposedly optimal strategy to be sub-optimal in the actual realizations. This paper revisits the optimal investment problem for the worker during the accumulation phase in the defined contribution pension scheme, via the forward preferences, in which an environment-adapting strategy is able to hold optimality and time-consistency together. Stochastic partial differential equation representation for the worker's forward preferences is illustrated. This paper constructs two of the forward utility preferences and solves the corresponding optimal investment strategies, in the cases of initial power and exponential utility functions.
Original languageEnglish
Pages (from-to)192-211
Number of pages20
JournalInsurance: Mathematics and Economics
Volume114
Early online date13 Dec 2023
DOIs
Publication statusPublished - Jan 2024

Keywords

  • Defined contribution pension scheme
  • Exogenous baseline strategy
  • Forward utility preferences
  • Optimal investment
  • Pre-commitment resolution

ASJC Scopus subject areas

  • Economics and Econometrics
  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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