How sub-optimal are age-based life-cycle investment products?

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Standard

How sub-optimal are age-based life-cycle investment products? / Khemka, Gaurav; Steffensen, Mogens; Warren, Geoffrey J.

I: International Review of Financial Analysis, Bind 73, 101619, 01.2021.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt

Harvard

Khemka, G, Steffensen, M & Warren, GJ 2021, 'How sub-optimal are age-based life-cycle investment products?', International Review of Financial Analysis, bind 73, 101619. https://doi.org/10.1016/j.irfa.2020.101619

APA

Khemka, G., Steffensen, M., & Warren, G. J. (2021). How sub-optimal are age-based life-cycle investment products? International Review of Financial Analysis, 73, [101619]. https://doi.org/10.1016/j.irfa.2020.101619

Vancouver

Khemka G, Steffensen M, Warren GJ. How sub-optimal are age-based life-cycle investment products? International Review of Financial Analysis. 2021 jan.;73. 101619. https://doi.org/10.1016/j.irfa.2020.101619

Author

Khemka, Gaurav ; Steffensen, Mogens ; Warren, Geoffrey J. / How sub-optimal are age-based life-cycle investment products?. I: International Review of Financial Analysis. 2021 ; Bind 73.

Bibtex

@article{4065ef5929c84b6482a34c73f442d9f0,
title = "How sub-optimal are age-based life-cycle investment products?",
abstract = "We investigate the conditions under which life-cycle investment strategies based on age may be {\textquoteleft}near enough{\textquoteright} to optimal, focusing on the treatment of the pension account balance and assumptions about risk aversion. We show that dynamically adjusting the strategy in response to fluctuations in balance as well as age can lead to moderate improvements over product designs currently seen in the market; although most of the potential gains might be captured by specifying the glide path with reference to measures reflecting the projected balance over time. The risk aversion assumption emerges as a far more important consideration, with much greater reductions in expected utility arising from mismatches between the risk aversion of the investor and that underpinning the glide path design. Our analysis suggests possibilities for improving life-cycle or target date funds, and highlights the benefit of offering a suite of such funds that cater for members with differing risk aversion.",
keywords = "Investment product design, Life-cycle models, Portfolio optimization, Target date funds",
author = "Gaurav Khemka and Mogens Steffensen and Warren, {Geoffrey J.}",
year = "2021",
month = jan,
doi = "10.1016/j.irfa.2020.101619",
language = "English",
volume = "73",
journal = "International Review of Financial Analysis",
issn = "1057-5219",
publisher = "Elsevier",

}

RIS

TY - JOUR

T1 - How sub-optimal are age-based life-cycle investment products?

AU - Khemka, Gaurav

AU - Steffensen, Mogens

AU - Warren, Geoffrey J.

PY - 2021/1

Y1 - 2021/1

N2 - We investigate the conditions under which life-cycle investment strategies based on age may be ‘near enough’ to optimal, focusing on the treatment of the pension account balance and assumptions about risk aversion. We show that dynamically adjusting the strategy in response to fluctuations in balance as well as age can lead to moderate improvements over product designs currently seen in the market; although most of the potential gains might be captured by specifying the glide path with reference to measures reflecting the projected balance over time. The risk aversion assumption emerges as a far more important consideration, with much greater reductions in expected utility arising from mismatches between the risk aversion of the investor and that underpinning the glide path design. Our analysis suggests possibilities for improving life-cycle or target date funds, and highlights the benefit of offering a suite of such funds that cater for members with differing risk aversion.

AB - We investigate the conditions under which life-cycle investment strategies based on age may be ‘near enough’ to optimal, focusing on the treatment of the pension account balance and assumptions about risk aversion. We show that dynamically adjusting the strategy in response to fluctuations in balance as well as age can lead to moderate improvements over product designs currently seen in the market; although most of the potential gains might be captured by specifying the glide path with reference to measures reflecting the projected balance over time. The risk aversion assumption emerges as a far more important consideration, with much greater reductions in expected utility arising from mismatches between the risk aversion of the investor and that underpinning the glide path design. Our analysis suggests possibilities for improving life-cycle or target date funds, and highlights the benefit of offering a suite of such funds that cater for members with differing risk aversion.

KW - Investment product design

KW - Life-cycle models

KW - Portfolio optimization

KW - Target date funds

U2 - 10.1016/j.irfa.2020.101619

DO - 10.1016/j.irfa.2020.101619

M3 - Journal article

AN - SCOPUS:85096571127

VL - 73

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

M1 - 101619

ER -

ID: 256678982