The Optimal Investment Policy for the Pension Benefit Guaranty Corporation

44 Pages Posted: 16 Jun 2010 Last revised: 14 Mar 2011

See all articles by Katarzyna Romaniuk

Katarzyna Romaniuk

Université de Paris 1 Panthéon-Sorbonne; Xi'an Jiaotong-Liverpool University (XJTLU)

Date Written: January 30, 2011

Abstract

The Pension Bene…fit Guaranty Corporation (PBGC) registers a preoccupying …financial condition since 2002. This paper builds a theoretical framework for defi…ning its optimal asset allocation in a continuous-time stochastic world. We …first recognize the PBGC’'s put seller nature and derive portfolio rules inspired by the option hedging literature. We then build a model characteristic of any asset-liability manager, whose implementation only requires the availability of the given institution'’s balance sheets. We propose an application using the PBGC’'s reports in the period 1995-2009. The optimal risky asset proportion, composed of the speculative fund and the cash fl‡ow and liabilities hedge terms, appears as low, as the second and - especially - third terms exert a downward pressure on the speculative portfolio component. We eventually compare the asset-liability management rules of the PBGC and a de…fined bene…fit pension fund and conclude that their asset allocation differs in the liabilities hedging principles.

Keywords: Pension Benefit Guaranty Corporation, defined benefit pension funds, optimal portfolio, option hedging, asset-liability management, stochastic dynamic programming

JEL Classification: C61, G11, G13, G22, G23

Suggested Citation

Romaniuk, Katarzyna, The Optimal Investment Policy for the Pension Benefit Guaranty Corporation (January 30, 2011). Available at SSRN: https://ssrn.com/abstract=1625437 or http://dx.doi.org/10.2139/ssrn.1625437

Katarzyna Romaniuk (Contact Author)

Université de Paris 1 Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, 75005
France

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123
China

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