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Asset allocation for a DC pension plan with minimum guarantee constraint and hidden Markov regime-switching

Published online by Cambridge University Press:  21 November 2022

Liuling Luo  and
Xingchun Peng Open the ORCID record for Xingchun Peng [Opens in a new window]
Liuling Luo
Affiliation:
School of Science, Wuhan University of Technology, Wuhan 430070, China. E-mail: luoliuling1604@whut.edu.cn; pxch@whut.edu.cn
Xingchun Peng
Affiliation:
School of Science, Wuhan University of Technology, Wuhan 430070, China. E-mail: luoliuling1604@whut.edu.cn; pxch@whut.edu.cn
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Abstract

This paper is devoted to the study of the asset allocation problem for a DC pension plan with minimum guarantee constraint in a hidden Markov regime-switching economy. Suppose that four types of assets are available in the financial market: a risk-free asset, a zero-coupon bond, an inflation-indexed bond and a stock. The expected return rate of the stock depends on unobservable economic states, and the change of states is described by a hidden Markov chain. In addition, the CIR process is used to describe the evolution of the nominal interest rate. The contribution rate is also assumed to be stochastic. The goal of investment management is to minimize the convex risk measure of the terminal wealth in excess of the minimum guarantee constraint. First, we transform the partially observable optimization problem into the one with complete information using the Wonham filtering technique and deal with the minimum guarantee constraint by constructing auxiliary processes. Furthermore, we derive the optimal investment strategy by the BSDE approach. Finally, some numerical results are presented to illustrate the impacts of some important parameters on investment behaviors.

Keywords

Convex risk measureDC pension planHidden Markov chainsMinimum guaranteeWonham filter
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 37 , Issue 4 , October 2023 , pp. 1035 - 1062
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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