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Dynamic Optimal Pension Fund Portfolios when Risk Preferences Are Heterogeneous among Pension Participants
Author(s) -
Honda Toshiki
Publication year - 2012
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2011.01148.x
Subject(s) - portfolio , pension , actuarial science , pension fund , target date fund , economics , asset (computer security) , risk aversion (psychology) , liability , welfare , mutual fund separation theorem , microeconomics , business , expected utility hypothesis , finance , financial economics , open end fund , computer science , institutional investor , market economy , corporate governance , computer security
In this paper, we consider the problem of an optimal pension fund portfolio given the heterogeneous risk preferences of pension fund participants. The relative risk aversion of a pension fund tends to be a decreasing function of the level of aggregate wealth. We find that the dynamic optimal portfolio is simply characterized as the weighted sum of the optimal portfolio for each participant. Our model helps successfully establish the microfoundation of asset liability management models. A numerical example using recent J apanese data indicates the significant total welfare losses of adopting a suboptimal portfolio strategy and an inefficient risk‐sharing rule.