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How can defined contribution pension plans benefit from momentum and mean reversion ?

Chetouane, Mabrouk (2011), How can defined contribution pension plans benefit from momentum and mean reversion ?, European Actuarial Journal, 1, supp. 2, p. 199-231. http://dx.doi.org/10.1007/s13385-011-0031-3

Type
Article accepté pour publication ou publié
Date
2011
Journal name
European Actuarial Journal
Volume
1
Number
supp. 2
Publisher
Springer
Pages
199-231
Publication identifier
http://dx.doi.org/10.1007/s13385-011-0031-3
Metadata
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Author(s)
Chetouane, Mabrouk
Abstract (EN)
In this paper, we assess whether the stock market downturn can be an opportunity for Defined Contribution pension plan members to reinforce their risky assets exposure? In line with the framework developed by Kojein et al. (Manag Sci 55(7):1199–1213, 2009), we consider a DC plan investor, during the accumulation phase, whose aim is to maximize his terminal wealth. Within a continuous portfolio choice model, in which stock returns exhibit both momentum and mean reversion, DC plan members are allowed to invest their pension wealth into stocks as well as cash and bond assets. We derived the optimal portfolio candidate and we show how a DC plan investor can benefit from market opportunities by taking advantage of the momentum and mean reversion stock return properties. We find that long term investors such as DC plan members would benefit from a temporary increase of the share of risky assets in their portfolio in preparation of their retirement.
Subjects / Keywords
Mean Reversion; Investment strategies; Defined contribution plan; Momentum
JEL
J32 - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
J26 - Retirement; Retirement Policies
G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
G11 - Portfolio Choice; Investment Decisions

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