Mean-variance efficiency of DC pension plan under stochastic interest rate and mean-reverting returns (Q2347101)

The authors of the paper study an optimal asset allocation problem of a defined contribution pension plan in a financial market where the interest rate is stochastic and modelled by an affine process, which is flexible enough to include both the Vasicek model and the CIR model. The price process of a stock follows another diffusion process where the expected return of the stock depends on a risk factor process attributed to the market price of risk of a stock index, and the risk factor process is governed by a mean-reverting process. The contribution rate is governed by a diffusion process having a similar structure with that of the stock index. The objective of a pensioner is to select a portfolio mix to maximize a mean-variance criterion. An auxiliary problem of the mean-variance optimization problem is constructed. The HJB dynamic programming approach is used to solve the auxiliary problem. The efficient frontier and strategies of the problem are studied. Numerical results for the sensitivity analysis of the efficient frontier and strategies are presented.