Ambiguity aversion and optimal derivative-based pension investment with stochastic income and volatility

Abstract

This paper provides a derivative-based optimal investment strategy for an ambiguityaverse pension investor who faces not only risks from time-varying income and market return volatility but also uncertain economic conditions over a long time horizon. We derive a robust dynamic derivative strategy and show that the optimal strategy under ambiguity aversion reduces the exposures to market return risk and volatility risk and that the investor holds opposite positions for the two risk exposures. In the presence of a derivative, ambiguity has distinct effects on the optimal investment strategy. More important, we demonstrate the utility improvement when considering ambiguity and exploiting derivatives and show that ambiguity aversion and derivative trading significantly improve utility when return volatility increases. This improvement becomes more significant under ambiguity aversion over a long investment horizon.

Robust equilibrium control-measure policy for a DC pension plan with state-dependent risk aversion under mean-variance criterion

“…Pun [37] establishes a general tractable framework for robust time-inconsistent stochastic control problems. Zeng et al [52] provide a derivative-based optimal policy for an ambiguity-averse pension investor who faces not only risks from stochastic income and market return volatility but also uncertain economic conditions.…”

Nash Equilibrium Strategy for a DC Pension Plan with State-Dependent Risk Aversion: A Multiperiod Mean-Variance Framework

“…Further, Björk and Murgoci [19] and Björk et al [20] extend their own work in Björk and Murgoci [17] and analyze the game theory in detail under the discretetime setting and continuous-time setting, respectively. More results with this approach can be found in Wang and Forsyth [21], Li et al [22], Wei et al [23], Wu and Chen [24], Zhao et al [25], Wu et al [26], Zeng et al [27], and so on.…”

Estimating the Gerber-Shiu Expected Discounted Penalty Function for Lévy Risk Model

“…Chau et al [6] used the Fourier-cosine method to evaluate the Gerber-Shiu function. For more studies on Gerber-Shiu function, the interested readers are referred to Yin and Wang [7,8], Asmussen and Albrecher [9], Chi [10], Wang et al [11], Chi and Lin [12], Zhao and Yin [13,14], Shen et al [15], Yu [16][17][18], Yin and Yuen [19,20], Zhao and Yao [21], Zheng et al [22], Huang et al [23], Li et al [24], Zhang et al [25], Yu et al [26], Zeng et al [27,28], Li et al [29], and Dong et al [30].…”