A0349
Title: The role of market and mortality jumps in optimal DC pension schemes
Authors: Immacolata Oliva - Sapienza University of Rome (Italy) [presenting]
Davide Feleppa - Sapienza University of Rome (Italy)
Abstract: The demographic shift marked by longer lifespans and lower birth rates poses challenges for worldwide PAYG pension systems. This shift has led to increased interest in pre-funded schemes, where individuals manage their investments throughout their careers to ensure sufficient retirement wealth. In addition, sudden events like pandemics or financial crises amplify uncertainty. The COVID-19 pandemic caused 1.6 million excess deaths in Europe (+8\%), impacting pension and insurance systems. Similarly, financial crashes underline market vulnerability. To address such risks, jump-diffusion models are adopted for both asset returns and mortality, capturing discontinuous shocks and heavy-tailed distributions. Optimal asset allocation is studied in a DC pension scheme using a mean-CVaR approach to manage downside risk. The model features a risk-free asset and a risky one with jump-diffusion dynamics. Longevity follows a mean-reverting process with jumps. Independent Poisson processes drive jumps in asset and mortality dynamics. A mortality-linked derivative is introduced for hedging. The investors' problem is framed as a dynamic stochastic optimization, solved by minimizing CVaR and maximizing terminal wealth. Semi-Lagrangian schemes are used for the inner problem, and gradient descent for the outer, based on viscosity solutions to a PIDE. Time-inconsistent preferences and pre-commitment strategies are included, and robust tools are offered for retirement planning under extreme risk.
