On the optimal asset allocation strategy for a defined contribution pension system with refund clause of premium with predetermined interest under Heston's volatility model

Volume 13, Issue 1, pp 53--64 http://dx.doi.org/10.22436/jnsa.013.01.05

Publication Date: September 11, 2019 Submission Date: December 17, 2018 Revision Date: May 19, 2019 Accteptance Date: June 03, 2019

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Authors

Edikan E. Akpanibah - Department of Mathematics and Statistics, Federal University Otuoke, P.M.B 126, Yenagoa, Bayelsa State, Nigeria. Bright O. Osu - Department of Mathematics, Michael Okpara University of Agriculture, Umudike, Abia State, Nigeria. Silas A. Ihedioha - Department of Mathematics, Plateau State University Bokkos, P.M.B 2012 Jos, Plateau state, Nigeria.

Abstract

In this paper, we study optimal asset allocation strategy for a defined contribution (DC) pension fund with return of premium clause under Heston's volatility model in mean-variance utility frame work. In this model, members' next of kin are allowed to withdraw their family members' accumulated premium with predetermined interest. Also, investments in one risk free asset and one risky asset are considered to help increase the accumulated funds of the remaining members in order to meet their retirement needs. Using the actuarial symbol, we formulize the problem as a continuous time mean-variance stochastic optimal control problem. We establish an optimization problem from the extended Hamilton Jacobi Bellman equations using the game theoretic approach and solve the optimization problem to obtain the optimal allocation strategy for the two assets, the optimal fund size and also the efficient frontier of the pension members. We analyze numerically the effect of some parameters on the optimal allocation strategy and deduce that as the initial wealth, predetermined interest rate and risk averse level increases, the optimal allocation policy for the risky asset (equity) decreases. Furthermore, we give a theoretical comparison of our result with an existing result and observed that the optimal allocation policy whose return is with predetermined interest is higher compared to that without predetermined interest.

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Keywords

• DC pension fund
• extended HJB equation
• optimal allocation policy
• refund of contribution clause
• interest rate

MSC

•  91G10
•  91B30

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