The Role of Inflation-Indexed Bond in Optimal Management of Defined Contribution Pension Plan During the Decumulation Phase

The Role of Inflation-Indexed Bond in Optimal Management of Defined Contribution Pension Plan During the Decumulation Phase

Blog Article

This paper investigates the optimal investment strategy for a defined contribution (DC) pension plan during the decumulation phase which is risk-averse and pays close attention to inflation risk.The plan aims to maximize the expected constant relative risk aversion (CRRA) utility from the terminal real Salmon Oil Omega 3 wealth by investing the fund in a financial market consisting of an inflation-indexed bond, an ordinary zero coupon bond and a risk-free asset.We derive the optimal investment strategy in closed-form using the dynamic programming approach by solving the related Instrument Knob Hamilton-Jacobi-Bellman (HJB) equation.

The results reveal that, with any level of the parameters, an inflation-indexed bond has significant advantage to hedge inflation risk.