Measuring and Controlling Shortfall Risk in Retirement

Inflation-Hedging Portfolios in Different Regimes

“…Different methodologies have been developed that move away from the standard mean-variance approach, by changing the risk measure of the portfolio. One branch of the literature considers portfolio selection with value at risk (Agarwal and Naik (2004), Martellini and Ziemann (2007)), or conditional VaR (Rockafellar and Uryasev (2000)); the other branch with shortfall probability (Leibowitz and Henriksson (1989), Leibowitz and Kogelman (1991), Lucas and Klaassen (1998), Billio and Casarin (2007), Smith and Gould (2007)). A useful development of our work would be to reconcile the two approaches and examine shortfall probabilities in the context of non-normal returns.…”

“…Roy defined the shortfall constraint such that the probability of the portfolio's value falling below a specified disaster level is limited to a specified disaster probability. Portfolio optimisations with a shortfall probability risk measure have been conducted before (Leibowitz and Henriksson (1989), Leibowitz and Kogelman (1991), Lucas and Klaassen (1998), Billio (2007), Smith and Gould (2007)), but as far as we know not in the context of an inflation hedging portfolio.…”

Improving the Outlook for a Successful Retirement: A Case for Using Downside Hedging

“…1 Dating to the work of Samuelson [1969] and Merton [1969], there is a substantial literature that has examined the issue of how asset allocation strategies should be designed to solve the retirement planning problem in an optimal manner; for example, see also Bodie and Crane [1997], Poterba and Samwick [2001], Schleef and Eisinger [2007], and Farhi and Panageas [2007]. In the more narrow literature of DH in retirement planning, it is again the case that some researchers consider the topic from the perspective of a dynamic asset allocation problem (e.g., Smith and Gould [2007], Irlam [2014]) while others consider how derivative-based solutions-such as the protective put options or collar arrangements explained below-can be employed to reduce income shortfall risk in retirement (e.g., Hanweck, Rhodes, and Schwider [2003], Baker, Logue, and Rader [2005], Milevsky [2006], Milevsky and Kyrychenko [2008]). 2 The topic of downside risk hedging is also one that has been explored in the research literature, both in terms of broad asset management applications as well as with respect to the more specific problem of retirement income management.…”

Longevity Risk and Retirement Income Planning

“…The authors' findings represent a change in emphasis from Milevsky's (1998) earlier option valuation approach; asset management now focuses on monitoring wealth relative to the SPV of consumption. Smith and Gould (2007) test the effect of a flexible withdrawal policy on shortfall probability. Their model assumes a 50% elasticity of spending; a 10% change in wealth generates a 5% change (in the same direction) in spending.…”