Details
| Original language | English |
|---|---|
| Pages (from-to) | 85-111 |
| Number of pages | 27 |
| Journal | Review of derivatives research |
| Volume | 19 |
| Issue number | 2 |
| Publication status | Published - 1 Jul 2016 |
| Externally published | Yes |
Abstract
We study the merits of capped retirement products with guarantee for investors who have the flexibility to dynamically adjust their investment strategy. All contracts under consideration are fairly priced such that the net profit of the provider is zero. Without the rider, an expected utility maximizing CRRA investor does not want an investment cap. Here, she commits herself to a strategy a priori. With the flexibility rider, the optimization problem changes and the optimal strategy is a response to an exogenously set price. A fair pricing then anticipates the optimal response of the investor. We show that the maximum expected utility of the investor can, for anticipated fairly priced products, be obtained for a finite cap. Thus, a capped product design can give a Pareto improvement to the otherwise uncapped contract version.
Keywords
- Investment caps, Investment flexibility, Minimum return guarantees, Pareto efficient contract design
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics, Econometrics and Finance (miscellaneous)
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In: Review of derivatives research, Vol. 19, No. 2, 01.07.2016, p. 85-111.
Research output: Contribution to journal › Article › Research › peer review
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TY - JOUR
T1 - Minimum return guarantees, investment caps, and investment flexibility
AU - Mahayni, Antje
AU - Schneider, Judith C.
N1 - Publisher Copyright: © 2015, Springer Science+Business Media New York.
PY - 2016/7/1
Y1 - 2016/7/1
N2 - We study the merits of capped retirement products with guarantee for investors who have the flexibility to dynamically adjust their investment strategy. All contracts under consideration are fairly priced such that the net profit of the provider is zero. Without the rider, an expected utility maximizing CRRA investor does not want an investment cap. Here, she commits herself to a strategy a priori. With the flexibility rider, the optimization problem changes and the optimal strategy is a response to an exogenously set price. A fair pricing then anticipates the optimal response of the investor. We show that the maximum expected utility of the investor can, for anticipated fairly priced products, be obtained for a finite cap. Thus, a capped product design can give a Pareto improvement to the otherwise uncapped contract version.
AB - We study the merits of capped retirement products with guarantee for investors who have the flexibility to dynamically adjust their investment strategy. All contracts under consideration are fairly priced such that the net profit of the provider is zero. Without the rider, an expected utility maximizing CRRA investor does not want an investment cap. Here, she commits herself to a strategy a priori. With the flexibility rider, the optimization problem changes and the optimal strategy is a response to an exogenously set price. A fair pricing then anticipates the optimal response of the investor. We show that the maximum expected utility of the investor can, for anticipated fairly priced products, be obtained for a finite cap. Thus, a capped product design can give a Pareto improvement to the otherwise uncapped contract version.
KW - Investment caps
KW - Investment flexibility
KW - Minimum return guarantees
KW - Pareto efficient contract design
UR - http://www.scopus.com/inward/record.url?scp=84946781476&partnerID=8YFLogxK
U2 - 10.1007/s11147-015-9116-5
DO - 10.1007/s11147-015-9116-5
M3 - Article
AN - SCOPUS:84946781476
VL - 19
SP - 85
EP - 111
JO - Review of derivatives research
JF - Review of derivatives research
SN - 1380-6645
IS - 2
ER -