We introduce a dynamic formulation for the problem of portfolio selection of pension funds in the absence of a risk-free asset. In emerging markets, a risk-free asset might be unavailable, and the approaches commonly used may no longer be suitable. We use a parametric approach to combine dynamic programming and Monte Carlo simulation to gain additional flexibility. This approach is general in the sense that optimal asset allocation is tractable for all HARA utility functions in the absence of a risk-free asset. The traditional case composed of several risky assets and one risk-free asset is compared to a case in which the risk-free asset is unavailable.
- Monte Carlo simulation
- Parametric methods
- Pension plan
- Portfolio selection
- Stochastic dynamic programming
Pimentel, L. F., & Santiago, L. (2015). Modeling a Dynamic Portfolio for Pension Plans in Emerging Markets With Myopic and Nonmyopic Behavior. Emerging Markets Finance & Trade, 51(Supplement 6), S14-S26. https://doi.org/10.1080/1540496X.2015.1080553