Constant proportion portfolio insurance in defined contribution pension plan management under discrete-time trading

Temoçin B. Z., Korn R., Selcuk-Kestel A. S.

ANNALS OF OPERATIONS RESEARCH, vol.260, pp.515-544, 2018 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 260
  • Publication Date: 2018
  • Doi Number: 10.1007/s10479-017-2638-5
  • Journal Name: ANNALS OF OPERATIONS RESEARCH
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Page Numbers: pp.515-544
  • Keywords: Defined-contribution pension plan, Portfolio insurance, CPPI, Discrete-time trading, Gap risk, Cash-lock risk, STRATEGIES
  • Middle East Technical University Affiliated: Yes

Abstract

Portfolio insurance strategies are designed to protect investors against adverse market movements by providing an initially specified guarantee during the investment period. This kind of a protection mechanism is especially important for systems with long investment horizons such as pension plans. In this paper, we consider various versions of the Constant Proportion Portfolio Insurance (CPPI) method under discrete-time trading for a defined-contribution pension plan that includes regular contributions of random size dependent on a stochastic income process. We compare different floor processes for the CPPI with regard to gap-risk and cash-lock probability by computing respective risk measures.