TY - JOUR
T1 - Managing the shortfall risk of target date funds by overfunding
AU - Barone Adesi, Giovanni
AU - Platen, Eckhard
AU - Sala, C.
N1 - Publisher Copyright:
Copyright © The Author(s), 2024. Published by Cambridge University Press.
PY - 2024/1/10
Y1 - 2024/1/10
N2 - 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.
AB - 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.
KW - dynamic investment policy
KW - hedging
KW - locally riskless payout
UR - http://www.scopus.com/inward/record.url?scp=85182586082&partnerID=8YFLogxK
U2 - 10.1017/S1474747223000240
DO - 10.1017/S1474747223000240
M3 - Article
AN - SCOPUS:85182586082
SN - 1474-7472
JO - Journal of Pension Economics and Finance
JF - Journal of Pension Economics and Finance
ER -