Managing the shortfall risk of target date funds by overfunding

Giovanni Barone Adesi, Eckhard Platen, Carlo Sala

Producció científica: Article en revista indexadaArticleAvaluat per experts


Is it possible to achieve almost riskless, nonfluctuating investment payoffs in the long run, at a fraction of the traditional funding requirement, using equity investments? What is their shortfall risk? These questions are motivated by the need to increase yields, while limiting the variability of investment results. We show how to use contingent claims, denominated in units of a stock index, to achieve an almost riskless investment outcome. To control the risk of the proposed hedge portfolios, we introduce an overfunded scheme and show its reliability using bootstrapping. Results show that a modest amount of overfunding is an effective risk-management approach that brings the probability of not achieving the target to less than 1 percent. Our results are based on the use of the minimal market model and a change of numeraire. Robustness tests support their validity under different market specifications.

Idioma originalAnglès
Nombre de pàgines25
RevistaJournal of Pension Economics and Finance
Data online anticipadade gen. 2024
Estat de la publicacióPublicació electrònica prèvia a la impressió - de gen. 2024


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