Hostname: page-component-76fb5796d-9pm4c Total loading time: 0 Render date: 2024-04-26T03:57:39.323Z Has data issue: false hasContentIssue false
  • English
  • Français

DYNAMIC ASSET ALLOCATION FOR TARGET DATE FUNDS UNDER THE BENCHMARK APPROACH

Published online by Cambridge University Press:  29 March 2021

Jin Sun ,
Dan Zhu  and
Eckhard Platen
Jin Sun*
Affiliation:
Department of Econometrics and Business Statistics, Monash University, E757 Menzies Building, Building 11, East Wing, Wellington Rd Clayton, VIC, Australia, E-Mail: jin.sun.freelancing@outlook.com
Dan Zhu
Affiliation:
Department of Econometrics and Business Statistics, Monash University, E757 Menzies Building, Building 11, East Wing, Wellington Rd Clayton, VIC, Australia, E-Mail: dan.zhu@monash.edu
Eckhard Platen
Affiliation:
Faculty of Sciences, UTS Business School, University of Technology Sydney, Ultimo, NSW, Australia, E-Mail: eckhard.platen@uts.edu.au
*
E-Mail: jin.sun.freelancing@outlook.com
Get access Rights & Permissions [Opens in a new window]

Abstract

Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

Keywords

Target date fundsoptimal glide pathdynamic asset allocationbenchmark approachG22G23C22
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 51 , Issue 2 , May 2021 , pp. 449 - 474
Copyright
© 2021 by Astin Bulletin. All rights reserved

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F. (1976) Studies in stock price volatility changes. Proceedings of the 1976 Business Meeting of the Business and Economic Statistics Section, pp. 177–181. American Statistical Association.Google Scholar
Campbell, J.Y. and Viceira, L. (2005) The term structure of the risk-return tradeoff. Technical report, National Bureau of Economic Research.CrossRefGoogle Scholar
Christie, A. (1982) The stochastic behavior of common stock variances: Value, leverage and interest rate effects. Journal of Financial Economics, 10, 407–432.CrossRefGoogle Scholar
Cox, J.C. and Huang, C-F. (1991) A variational problem arising in financial economics. Journal of Mathematical Economics, 20(5), 465–487.CrossRefGoogle Scholar
Duffie, D. and Skiadas, C. (1994) Continuous-time security pricing: A utility gradient approach. Journal of Mathematical Economics, 23(2), 107–131.CrossRefGoogle Scholar
Elton, E.J., Gruber, M.J., de Souza, A. and Blake, C.R. (2015) Target date funds: Characteristics and performance. The Review of Asset Pricing Studies, 5(2), 254–272.CrossRefGoogle Scholar
Engle, R.F. and Ng, V.K. (1993) Measuring and testing the impact of news on volatility. The Journal of Finance, 48(5), 1749–1778.CrossRefGoogle Scholar
Fergusson, K. and Platen, E. (2006) On the distributional characterization of log-returns of a world stock index. Applied Mathematical Finance, 13(1), 19–38.CrossRefGoogle Scholar
Johnson, W.F. and Yi, H.-C. (2017) Do target date mutual funds meet their targets? Journal of Asset Management, 18(7), 566–579.CrossRefGoogle Scholar
Kabanov, Y., Kardaras, C. and Song, S. (2016) No arbitrage of the first kind and local martingale numéraires. Finance and Stochastics, 20(4), 1097–1108.CrossRefGoogle Scholar
Karatzas, I. and Shreve, S.E. (1991) Brownian Motion and Stochastic Calculus, 2nd edn. New York: Springer.Google Scholar
Kelly, J.R. (1956) A new interpretation of information rate. Bell System Technical Journal, 35, 917–926.CrossRefGoogle Scholar
Koop, G. M. (2003) Bayesian econometrics. John Wiley & Sons Inc.Google Scholar
Loewenstein, M. and Willard, G.A. (2000) Local martingales, arbitrage, and viability free snacks and cheap thrills. Economic Theory, 16(1), 135–161.CrossRefGoogle Scholar
Mitchell, O.S. and Utkus, S. (2012) Target-date funds in 401 (k) retirement plans. Technical report, National Bureau of Economic Research.CrossRefGoogle Scholar
Morningstar (2018) 2018 target-date fund landscape sizing up the trillion-dollar, increasingly passive giant.Google Scholar
Nelson, D.B. (1991) Conditional heteroskedasticity in asset returns: A new approach, 59, 347–370.CrossRefGoogle Scholar
Platen, E. and Heath, D. (2006) A Benchmark Approach to Quantitative Finance. Springer Finance. Springer.CrossRefGoogle Scholar
Platen, E. and Rendek, R. (2012) Approximating the numeraire portfolio by naive diversification. Journal of Asset Management, 13(1), 34–50.CrossRefGoogle Scholar
Revuz, D. and Yor, M. (1999) Continuous Martingales and Brownian Motion, 3rd edn. Berlin, Heidelberg: Springer.Google Scholar
Rüschendorf, L. and Vanduffel, S. (2019) On the construction of optimal payoffs. Decisions in Economics and Finance, 1–25.Google Scholar
Shiller, R.J. (2015) Irrational Exuberance: Revised and Expanded Third Edition. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
VanDerhei, J., Holden, S., Alonso, L. and Bass, S. (2012) 401 (k) plan asset allocation, account balances, and loan activity in 2011. EBRI issue brief (380).Google Scholar
VanDerhei, J., Holden, S., Alonso, L. and Bass, S. (2013) 401 (k) plan asset allocation, account balances, and loan activity in 2012. EBRI issue brief (394).Google Scholar
Yoon, Y. (2010) Glide path and dynamic asset allocation of target date funds. Journal of Asset Management, 11(5), 346–360.CrossRefGoogle Scholar