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Optimal Portfolio Allocation for Corporate Pension Funds
Author(s) -
McCarthy David,
Miles David
Publication year - 2013
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2010.00594.x
Subject(s) - asset allocation , pension , pension plan , asset (computer security) , pension insurance , portfolio allocation , portfolio , business , actuarial science , target date fund , economics , finance , microeconomics , institutional investor , corporate governance , computer security , computer science , open end fund
We model the asset allocation decision of a stylised corporate defined benefit pension plan in the presence of hedgeable and unhedgeable risks. We assume that plan fiduciaries – who make the asset allocation decision – face non–linear payoffs linked to the plan's funding status because of the presence of pension insurance and a sponsoring employer who may share any shortfall or pension surplus. We find that even simple asymmetries in payoffs have large and highly persistent effects on asset allocation, while unhedgeable risks exert only a small effect. We conclude that institutional details are crucial in understanding DB pension asset allocation .