Optiomal Asset Allocation For Pension Funds With Stochastic Interest Rate And Inflation

Nowadays, with aging of population personal pesion plan begin to attract wider attention. The paper considers from a macro-economic view and analyses two important issues about pension asset allocation: a) what influence does macro-economy have on pension asset return and allocation, b) what is the optimal allocation strategy based on macro-economy status, and how we can tailor adjustment depending on different beneficiaries.First of all, the paper studied the connection between economy cycle and security market cycle, pointing out that the general economy is the most prominent factor that affects assest return. The paper also analyses data such as GDP growth, inflation, interest rate, to study their conduction effect on stocks and bonds. Meanwhile, considering the interest rate and inflation is the most important factor affecting general economy, the paper sets up optimal asset allocation model based on stochastic inflation and random real interest rate. Tailored models are built for cash, stock and bonds, and analytic solutions are offered respectively.Then, the paper makes estimation on the model's major parameters, analysing results on multiple dimensions. The output of the model will be tailored optimal asset allocations for different beneficiaries, reflecting their different age, different attitude towards risks and different expectation of economic cycle. The result of the analysis suggests, the older the beneficiary, the lower level of asset should be allocated to risk assets. For different beneficiaries, the degree of risk-aversion coefficient plays a dominant role in the allocation of risk asset. Meanwhile, pension managers' judgement on economic cycle significantly influences their asset allocation strategies to keep bonds in recession, stocks in recovery and cash in deflation.