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Article

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

1
Risk Management Department, Banco de Portugal, 1100-150 Lisboa, Portugal
2
Alumni, Lisbon University Institute (ISCTE-IUL), 1649-026 Lisboa, Portugal
3
Department of Finance, Lisbon University Institute (ISCTE-IUL) and Business Research Unit (BRU-IUL), 1649-026 Lisboa, Portugal
4
NOVA IMS—Information Management School, New University of Lisbon, 1070-312 Lisboa, Portugal
5
Department of Economics, Université Paris-Dauphine PSL, 75775 Paris, France
*
Author to whom correspondence should be addressed.
Academic Editors: Mogens Steffensen and Tomas Kliestik
Risks 2021, 9(4), 60; https://doi.org/10.3390/risks9040060
Received: 10 February 2021 / Revised: 14 March 2021 / Accepted: 22 March 2021 / Published: 25 March 2021
(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)
Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies. View Full-Text
Keywords: pensions; interest rate risk; immunization; duration; M-Absolute; inflation risk; life insurance pensions; interest rate risk; immunization; duration; M-Absolute; inflation risk; life insurance
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MDPI and ACS Style

Simões, C.; Oliveira, L.; Bravo, J.M. Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits. Risks 2021, 9, 60. https://doi.org/10.3390/risks9040060

AMA Style

Simões C, Oliveira L, Bravo JM. Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits. Risks. 2021; 9(4):60. https://doi.org/10.3390/risks9040060

Chicago/Turabian Style

Simões, Cláudia, Luís Oliveira, and Jorge M. Bravo 2021. "Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits" Risks 9, no. 4: 60. https://doi.org/10.3390/risks9040060

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