Surplus Optimization in Defined Benefit Pensions Using the Regime-Switching Model: Occupational Pension Plans in South Korea
- Authors
- Jung, Hyeonjong; Lee, Dong-Hwa; Cheong, Do Young
- Issue Date
- Oct-2022
- Publisher
- 한국증권학회
- Keywords
- ALM; Conditional surplus at risk; E32; E37; G11; Hidden Markov model; Optimization; Portfolio
- Citation
- Asia-Pacific Journal of Financial Studies, v.51, no.5, pp 709 - 734
- Pages
- 26
- Indexed
- SSCI
SCOPUS
KCI
- Journal Title
- Asia-Pacific Journal of Financial Studies
- Volume
- 51
- Number
- 5
- Start Page
- 709
- End Page
- 734
- URI
- https://scholarworks.bwise.kr/erica/handle/2021.sw.erica/115261
- DOI
- 10.1111/ajfs.12396
- ISSN
- 2041-9945
2041-6156
- Abstract
- We assume a hypothetical defined benefit (DB) pension plan that reflects the characteristics of the occupational pension in South Korea and propose a surplus optimization strategy using a regime-switching model. Using conditional surplus at risk, we construct an optimized portfolio that limits extreme tail risks. Furthermore, we identify the surplus risk and return conditional on global macroeconomic status using a hidden Markov model. The main results are that (i) the DB pension portfolio should move from principal-protected products to diverse capital market products, and (ii) the DB pension portfolio using the regime-switching model outperforms an unconditional static portfolio. © 2022 Korean Securities Association.
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