When Prospect Theory Preference Meets Mean-Reverting Asset Returns: A Dynamic Asset Allocation Model

OPTIMAL CONTROL OF THE DECUMULATION OF A RETIREMENT PORTFOLIO WITH VARIABLE SPENDING AND DYNAMIC ASSET ALLOCATION

Astin Bulletin ◽

10.1017/asb.2021.19 ◽

2021 ◽

pp. 1-34

Author(s):

Peter A. Forsyth ◽

Kenneth R. Vetzal ◽

Graham Westmacott

Keyword(s):

Asset Allocation ◽

Asset Returns ◽

Retirement Savings ◽

Allocation Strategy ◽

Investment Portfolio ◽

Dynamic Asset Allocation ◽

Dynamic Strategy ◽

Prior Literature ◽

Weighted Combination ◽

Over Time

Abstract We extend the Annually Recalculated Virtual Annuity (ARVA) spending rule for retirement savings decumulation (Waring and Siegel (2015) Financial Analysts Journal, 71(1), 91–107) to include a cap and a floor on withdrawals. With a minimum withdrawal constraint, the ARVA strategy runs the risk of depleting the investment portfolio. We determine the dynamic asset allocation strategy which maximizes a weighted combination of expected total withdrawals (EW) and expected shortfall (ES), defined as the average of the worst 5% of the outcomes of real terminal wealth. We compare the performance of our dynamic strategy to simpler alternatives which maintain constant asset allocation weights over time accompanied by either our same modified ARVA spending rule or withdrawals that are constant over time in real terms. Tests are carried out using both a parametric model of historical asset returns as well as bootstrap resampling of historical data. Consistent with previous literature that has used different measures of reward and risk than EW and ES, we find that allowing some variability in withdrawals leads to large improvements in efficiency. However, unlike the prior literature, we also demonstrate that further significant enhancements are possible through incorporating a dynamic asset allocation strategy rather than simply keeping asset allocation weights constant throughout retirement.

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Abnormal Portfolio Asset Allocation Model: Review

International Journal of Business, Economics, and Social Development ◽

10.46336/ijbesd.v1i1.18 ◽

2020 ◽

Vol 1 (1) ◽

pp. 46-54

Author(s):

Nurfadhlina Bt Abdul Halima ◽

Dwi Susanti ◽

Alit Kartiwa ◽

Endang Soeryana Hasbullah

Keyword(s):

Asset Allocation ◽

Asset Returns ◽

Higher Moments ◽

Investment Portfolio ◽

Allocation Model ◽

Model Review ◽

The Mean ◽

Mean Variance ◽

Skewness And Kurtosis ◽

Normally Distributed

It has been widely studied how investors will allocate their assets to an investment when the return of assets is normally distributed. In this context usually, the problem of portfolio optimization is analyzed using mean-variance. When asset returns are not normally distributed, the mean-variance analysis may not be appropriate for selecting the optimum portfolio. This paper will examine the consequences of abnormalities in the process of allocating investment portfolio assets. Here will be shown how to adjust the mean-variance standard as a basic framework for asset allocation in cases where asset returns are not normally distributed. We will also discuss the application of the optimum strategies for this problem. Based on the results of literature studies, it can be concluded that the expected utility approximation involves averages, variances, skewness, and kurtosis, and can be extended to even higher moments.

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Optimal portfolio and spending rules for endowment funds

Review of Quantitative Finance and Accounting ◽

10.1007/s11156-019-00856-x ◽

2019 ◽

Vol 55 (2) ◽

pp. 671-693

Author(s):

Muhammad Kashif ◽

Francesco Menoncin ◽

Iqbal Owadally

Keyword(s):

Numerical Analysis ◽

Asset Allocation ◽

Optimal Portfolio ◽

Dynamic Asset Allocation ◽

Optimal Portfolios ◽

Allocation Model ◽

Hybrid Strategy ◽

Market Growth ◽

Long Run

AbstractWe investigate the role of different spending rules in a dynamic asset allocation model for university endowment funds. In particular, we consider the fixed consumption-wealth ratio (CW) rule and the hybrid rule which smoothes spending over time. We derive the optimal portfolios under these two strategies and compare them with a theoretically optimal (Merton) strategy. We show that the optimal portfolio with habit is less risky compared to the optimal portfolio without habit. A calibrated numerical analysis on U.S. data shows, similarly, that the optimal portfolio under the hybrid strategy is less risky than the optimal portfolios under both the CW and the classical Merton strategies, in typical market conditions. Our numerical analysis also shows that spending under the hybrid strategy is less volatile than the other strategies. Thus, endowments following the hybrid spending rule use asset allocation to protect spending. However, in terms of the endowment’s wealth, the hybrid strategy comparatively outperforms the conventional Merton and CW strategies when the market is highly volatile but under-performs them when there is strong stock market growth and low volatility. Overall, the hybrid strategy is effective in terms of stability of spending and intergenerational equity because, even if it allows short-term fluctuation in spending, it ensures greater stability in the long run.

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