Transnational investment strategies for DC pension plan under inflation and model ambiguity

i

This article has been updated. A Correction to this article was published on .

i

The Original Article was published on

i

The Original Article was published on

i

This article has been updated

i

This article was retracted on

i

This article has been updated

Abstract

This paper studies the optimal portfolio decisions of participants in defined contribution (DC) pension plans who are able to invest their wealth in transnational securities. More specifically, pension participants can allocate their investments across cash, bonds, domestic stocks, foreign stocks, inflation-indexed instruments, and exchange rate futures. Furthermore, we assume that pension managers face ambiguity regarding the distribution of foreign asset prices. In this context, by employing dynamic programming and the “relative entropy penalty” method, the paper derives robust optimal portfolio strategies for DC pension plan participants, accompanied by a verification theorem. Additionally, we explore two specific scenarios: the optimal investment strategy for pension managers under ambiguity neutrality, and the utility loss incurred by ambiguity-averse fund managers who misapply the optimal investment strategy. Our analysis is illustrated through numerical examples.

Keywords

DC pension plan / optimal strategy / transnational investment / ambiguity aversion / inflation

CHANGE HISTORY

A Correction to this paper has been published:
https://doi.org

The Retraction Note was updated to reflect reception of statements of disagreement from all authors.

This article has been retracted.Please see the Retraction Notice for more detail:
https://doi.org

References

[1] Y. Gao, X. Rong, R. Ti, Optimal management of the collective defined contribution pension plan with long-term care insurance, N. Am. Actuarial J., 31 (2025), 1-29. https://doi.org/10.1080/10920277.2025.2532073

[2] D. Doreleijers, C. Hambel, Dynamic portfolio choice with regret aversion and rejoicing, Finance Res. Lett., 84 (2025), 107762. https://doi.org/10.1016/j.frl.2025.107762

[3] D. Li, J. Bi, M. Hu, Alpha robust mean variance investment strategy for DC pension plan with uncertainty about jump-diffusion risk, RAIRO Oper. Res., 55 (2021), S2983-S2997. https://doi.org/10.1051/ro/2020132

[4] P. Wang, Z. Li, J. Sun, Robust portfolio choice for a DC pension plan with inflation risk and mean reverting risk premium under ambiguity, Optimization, 70 (2021), 191-224. https://doi.org/10.1080/02331934.2019.1679812

[5] L. Wang, B. Jia, Equilibrium investment strategies for a defined contribution pension plan with random risk aversion, Insur. Math. Econ., 125 (2025), 103140. https://doi.org/10.1016/j.insmatheco.2025.103140

[6] Y. Dong, H. Zheng, Optimal investment with S shaped utility and trading and value at risk constraints: An application to defined contribution pension plan, Eur. J. Oper. Res., 281 (2020), 341-356. https://doi.org/10.1016/J.EJOR.2019.08.034

[7] H. Levy, M. Sarnat, International diversification of investment portfolios, Am. Econ. Rev., 60 (1970), 668-675.

[8] P. Jorion, Asset allocation with hedged and unhedged foreign stocks and bonds, J. Portfolio Manage., 15 (1989), 49-54. https://doi.org/10.3905/JPM.1989.409221

[9] C. Guo, X. Zhuo, C. Constantinescu, O. M. Pamen, Optimal reinsurance-investment strategy under risks of interest rate, exchange rate and inflation, Methodol. Comput. Appl. Probab., 20 (2018), 1477-1502. https://doi.org/10.1007/S11009-018-9630-7

[10] E. Anderson, L. P. Hansen, T. Sargent, Robustness, detection and the price of risk, Manuscr., Stanford, (2000), 19.

[11] R. Uppal, T. Wang, Model misspecification and underdiversification, J. Finance, 58 (2002), 2465-2486. https://doi.org/10.2139/SSRN.294201

[12] P. J. Maenhout, Robust portfolio rules and asset pricing, Rev. Financ. Stud., 17 (2004), 951-983. https://doi.org/10.2307/3598055

[13] K. Peijnenburg, Life-cycle asset allocation with ambiguity aversion and learning, J. Financ. Quant. Anal., 53 (2018), 1963-1994. https://doi.org/10.1017/S0022109017001144

[14] Y. Ait-Sahalia, F. Matthys, Robust consumption and portfolio policies when asset prices can jump, J. Econ. Theory, 179 (2019), 1-56. https://doi.org/10.1016/J.JET.2018.09.006

[15] G. Guan, Z. Liang, Robust optimal reinsurance and investment strategies for an AAI with multiple risks, Insur. Math. Econ., 89 (2019), 63-78. https://doi.org/10.1016/J.INSMATHECO.2019.09.004

[16] D. Kostopoulos, S. Meyer, C. Uhr, Ambiguity about volatility and investor behavior, J. Financ. Econ., 145 (2022), 277-296. https://doi.org/10.1016/j.jfineco.2021.07.004

[17] I. Baltas, L. Dopierala, K. Kolodziejczyk, M. Szczepanski, G. W. Weber, A. N. Yannacopoulos, Optimal management of defined contribution pension funds under the effect of inflation, mortality and uncertainty, Eur. J. Oper. Res., 298 (2022), 1162-1174. https://doi.org/10.1016/j.ejor.2021.08.038

[18] S. Meyer, U. Charline, Ambiguity and private investors’ behavior after forced fund liquidations, J. Financ. Econ., 156 (2024), 103849-103851. https://doi.org/10.1016/j.jfineco.2024.103849

[19] G. Deelstra, M. Grasselli, P. F. Koehl, Optimal investment strategies in the presence of a minimum guarantee, Insur. Math. Econ., 33 (2003), 189-207. https://doi.org/10.1016/S0167-6687(03)00153-7

[20] N. W. Han, M. W. Hung, Optimal asset allocation for DC pension plans under inflation, Insur. Math. Econ., 51 (2012), 172-181. https://doi.org/10.1016/J.INSMATHECO.2012.03.003

[21] J. F. Boulier, S. Huang, G. Taillard, Optimal management under stochastic interest rates: the case of a protected defined contribution pension fund, Insur. Math. Econ., 28 (2001), 173-189. https://doi.org/10.1016/S0167-6687(00)00073-1

[22] A. Lioui, P. Poncet, Optimal currency risk hedging, J. Int. Money Finance, 21 (2002), 241-264. https://doi.org/10.1016/S0261-5606(01)00045-6

[23] K. I. Amin, R. A. Jarrow, Pricing foreign currency options under stochastic interest rates, J. Int. Money Finance, 10 (1991), 310-329. https://doi.org/10.1016/0261-5606(91)90013-A

[24] G. Guan, Z. Liang, Optimal management of DC pension plan in a stochastic interest rate and stochastic volatility framework, Insur. Math. Econ., 57 (2014), 58-66. https://doi.org/10.1016/J.INSMATHECO.2014.05.004

[25] P. Wang, Z. Li, Robust optimal investment strategy for an AAM of DC pension plans with stochastic interest rate and stochastic volatility, Insur. Math. Econ., 80 (2018), 67-83. https://doi.org/10.1016/J.INSMATHECO.2018.03.003

[26] E. Bayraktar, Y. Zhang, Minimizing the probability of lifetime ruin under ambiguity aversion, SIAM J. Control Optim., 53 (2015), 58-90. https://doi.org/10.1137/140955999

[27] B. Liu, M. Zhou, Robust portfolio selection for individuals: Minimizing the probability of lifetime ruin, J. Ind. Manage. Optim., 13 (2021), 937-942. https://doi.org/10.3934/JIMO.2020005

[28] C. R. Flor, L. S. Larsen, Robust portfolio choice with stochastic interest rates, Ann. Finance, 10 (2014), 243-265. https://doi.org/10.1007/s10436-013-0234-5

[29] M. Escobar, S. Ferrando, A. Rubtsov, Robust portfolio choice with derivative trading under stochastic volatility, J. Banking Finance, 61 (2015), 142-157. https://doi.org/10.1016/j.jbankfin.2015.08.033

[30] N. Branger, L. S. Larsen, C. Munk, Robust portfolio choice with ambiguity and learning about return predictability, J. Banking Finance, 37 (2013), 1397-1411. https://doi.org/10.1016/j.jbankfin.2012.05.009

[31] M. Taksar, X. D. Zeng, A general stochastic volatility model and optimal portfolio with explicit solutions, in Working Paper, 2009.

[32] H. Kraft, Optimal Portfolios with Stochastic Interest Rates and Defaultable Assets, Springer Science and Business Media, 2004.