Managing the shortfall risk of target date funds by overfunding

Giovanni Barone Adesi, Eckhard Platen, Carlo Sala

Research output: Indexed journal article Articlepeer-review


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.

Original languageEnglish
Number of pages25
JournalJournal of Pension Economics and Finance
Early online dateJan 2024
Publication statusE-pub ahead of print - Jan 2024


  • dynamic investment policy
  • hedging
  • locally riskless payout


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