Author(s): Manasi Goral and Talawar AS

Abstract: This paper presents a stochastic optimal control model to determine optimal investment strategies in a defined contribution pension plan, accounting for pre-retirement phase under a stochastic interest rate environment. Unlike traditional models that assume constant risk-free rates, this study utilizes the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) type models to capture the time-varying and asymmetric volatility of interest rates, a key factor in retirement planning amid uncertain economic conditions. Wealth dynamics are modeled with investments in both a risky asset and a risk-free asset, where the risk-free rate follows a GARCH process to realistically reflect fluctuating interest rates. The resulting stochastic differential equations for wealth evolution incorporate both the volatility of the risky asset and the conditional heteroskedasticity of the interest rate. Simulation results indicate that optimal investment strategies are significantly influenced by the stochastic nature of interest rates, with implications for asset allocation shifts before retirement. By incorporating GARCH-type modeled interest rates, the approach provides a robust framework for managing risk and optimizing returns in retirement planning, offering valuable insights for pension fund managers and financial planners navigating dynamic interest rate environments.

Pages: 29-34 | Views: 98 | Downloads: 7

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