Location of Repository

Interest Rate and Inflation Risk ∗

By Raimond H. Maurer, Christian Schlag and Michael Z. StamosRaimond H. Maurer, Christian Schlag and Michael Z. Stamos

Abstract

The worldwide shift from public pay-as-you-go pension systems to privately funded pension schemes is accompanied by a huge increase in the households capital stock mounting to trillions of dollars worldwide which pour into defined contribution pension plans. In order to assess how these funds should be optimally invested, we derive the optimal time-dependent portfolio allocation strategy taking into account long-term stock market, term structure, and inflation risk. Our results confirm that the often advised so-called life-cycle strategy is optimal if non-financial wealth is taken into account. We also benchmark common longterm defined contribution asset allocation strategies relative to the optimum in order to the assess welfare implications for varying investment horizons and risk aversions. The outcome of utility heavily depends on whether the risk aversion of the investor is estimated appropriately. Misestimation of this parameter and hence wrong investment advice can lead to utility losses of around 60 percent in terms of certainty equivalent wealth

Year: 2007
OAI identifier: oai:CiteSeerX.psu:10.1.1.320.4695
Provided by: CiteSeerX
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://citeseerx.ist.psu.edu/v... (external link)
  • http://www.dgf2008.de/content/... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.