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    Chance-constrained optimization for pension fund portfolios in the presence of default risk

    241795_241795.pdf (943.2Kb)
    Access Status
    Open access
    Authors
    Sun, Y.
    Aw, E.
    Loxton, R.
    Teo, Kok Lay
    Date
    2016
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Sun, Y. and Aw, E. and Loxton, R. and Teo, K.L. 2016. Chance-constrained optimization for pension fund portfolios in the presence of default risk. European Journal of Operational Research. 256 (1): pp. 205-214.
    Source Title
    European Journal of Operational Research
    DOI
    10.1016/j.ejor.2016.06.019
    ISSN
    0377-2217
    School
    Department of Mathematics and Statistics
    URI
    http://hdl.handle.net/20.500.11937/5038
    Collection
    • Curtin Research Publications
    Abstract

    In this paper, we consider the portfolio optimization problem for a pension fund consisting of various government and corporate bonds. The aim of the problem is to maximize the fund's cash position at the end of the time horizon, while allowing for the possibility of bond defaults. We model this problem as a stochastic discrete-time optimal control problem with a chance constraint that ensures all future outgoing commitments can be met with sufficiently high probability. We then introduce a corresponding deterministic formulation that is a conservative approximation of the original stochastic optimal control problem. This approximate problem can be solved using gradient-based optimization techniques. We conclude the paper with a simulation study.

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