DYNAMIC DISCRETE-TIME PORTFOLIO SELECTION FOR DEFINED CONTRIBUTION PENSION FUNDS WITH INFLATION RISK

Abstract

This paper investigates a multi-period asset allocation problem for a defined contribution (DC) pension fund facing stochastic inflation under the Markowitz mean-variance criterion. The stochastic inflation rate is described by a discrete-time version of the Ornstein-Uhlenbeck process. To the best of our knowledge, the literature along the line of dynamic portfolio selection under inflation is dominated by continuous-time models. This paper is the first work to investigate the problem in a discrete-time setting. Using the techniques of state variable transformation, matrix theory, and dynamic programming, we derive the analytical expressions for the efficient investment strategy and the effi..