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Optimal Asset Allocation of a Pension Fund: Does The Fear of Regret Matter?

Journal of Economics Library

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Title Optimal Asset Allocation of a Pension Fund: Does The Fear of Regret Matter?
 
Creator IBHAGUI, Oyakhilome; : Wallace Ibhagui, Department of Economics, D3-06 Keynes College, University of Kent, Canterbury, CT2 7NP, UK. Phone: +00 + 44 (0)1227824319. Fax: +00 +44 (0)1227 827850. Email: oi50@kent.ac.uk
 
Subject Financial markets; Asset allocation; Log-logistic; Modified utility; Mortality; Pension fund; Regret aversion.
G23; G11; C61.
 
Description Abstract. In this paper, which presents a simplified behavioral finance model, we incorporate regret into the decision-making process of a pension fund and derive the optimal asset allocation of a final-wealth-maximizing pension fund in the accumulation and decumulation phases. We find that the optimal allocation must be congruent in both phases if and only if the pension fund is upside regret averse. In particular, our results suggest that allocation to risky assets must increase through time in the accumulation and decumulation phases so that the pension fund can realize gains from any upsides in the risky asset market, thereby maximizing final wealth and limiting the feeling of regret ex-post. Although decisions in both phases are congruent, we find that the optimal asset allocation generally depends on wealth levels. This evidence implies that separate management of the accumulation and decumulation phases of a pension fund decreases available wealth levels and is not an optimal strategy.Keywords. Financial Markets. Asset allocation. Log-logistic. Modified utility. Mortality. Pension fund. Regret aversion.JEL. G23, G11, C61.
 
Publisher Journal of Economics Library
 
Contributor —
 
Date 2017-07-13
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://www.kspjournals.org/index.php/JEL/article/view/1281
10.1453/jel.v4i2.1281
 
Source Journal of Economics Library; Vol 4, No 2 (2017): June; 130-159
2149-2379
 
Language eng
 
Relation http://www.kspjournals.org/index.php/JEL/article/view/1281/1279
http://www.kspjournals.org/index.php/JEL/article/downloadSuppFile/1281/631
 
Rights Copyright (c) 2017 Journal of Economics Library
http://creativecommons.org/licenses/by-nc/4.0