Inflation Indexed Bonds,Minimum Return Guarantee And Investment Strategy Of Pension Fund

As the urbanization and population aging continue to accelerate in China,social security spending continues to increase,the gaps of pension funds continue to widen,forced upward pressure on inflation,in order to achieve the preservation and added value to pension funds and ensure the timely payment of pensions,the government in China actively promotes pension funds to enter the capital market for entrusted investment.Under this background,how to allocate assets of pension funds to overcome the risk of inflation,how to guarantee the security of pension funds when market returns decline,how to get corresponding benefits when the market is developing well,and how to ensure that entrusted investment institutions can achieve the maximization of expected utility of the fund are important issues that relate to the development of the country and social stability and deserves further study.Inflation is one of the major risks to pension fund investments.Traditional financial assets,such as cash,nominal bonds and stocks,do not overcome the risks of inflation.Inflation indexed bonds are considered real long-term risk-free assets that can adequately overcome the inflation risk of investments.Therefore,how to price inflation indexed bonds accurately is crucial.This paper develops a two-factor continuous-time pricing model for inflation-indexed bonds,considers interest rate risk and inflation risk,solves the theoretical price of inflation-indexed bonds under the risk-neutral measure,and analyzes the defensive effect of inflation indexed bonds on inflation,the effects of nominal interest rates,inflation rates,volatility and bond maturities on the prices of inflation-indexed bonds.The pension fund insured or the government pension fund management agency entrusts the pension fund to an investment institution for investment and operation,thus forming the entrusted investment relationship between the pension fund insured and the investment institution.The optimization objective of insured and investment institution is to maximize their expected utility of real terminal wealth respectively.However,the optimal asset allocation strategy of institutional investors may not be able to maximize the expected utility of insured persons.In addition,how pension fund contributions affect the optimal asset allocation strategy,if pension fund should invest and how to invest in inflation indexed bonds deserve further study.In this paper,we introduce inflation indexed bonds into the financial market and get the optimal asset allocation strategy which can realize the maximization of expected utility of the insured and the investment institution simultaneously by stochastic dynamic programming under the preference of Constant Relative Risk Aversion(CRRA).This paper uses the data of financial market in our country to analyze the influence of the related parameters,such as pension contributions,inflation indexed bonds,investment terms and risk preference,on the optimal asset allocation strategy and utility function.Setting the minimum return guarantee system in entrusted investment of pension funds can guarantee the safety and profitability of pension fund investment.Investment institutions provide the minimum return guarantee for pension funds,and withdraw investment and management expenses as compensation.Based on the dual perspectives of the insured persons and the entrusted investment institutions,this paper studies the impact of the system of minimum return guarantee and the system of investment and management fees on the optimal asset allocation of pension funds.According to whether the investment institutions provide the lowest return guarantee for pension fund investment and how to withdraw the investment and management fee,the entrusted investment in pension is divided into four modes.Under the framework of stochastic interest rate,using the method of option pricing and stochastic dynamic programming,we get the solution of the optimal investment strategy and the optimal investment and management rate of pension funds under different modes of entrusted investment.Using the data of the financial market in our country,this paper analyzes the influence of minimum return guarantee,investment and management rate and other related parameters on the optimal asset allocation strategy and utility function.This article has carried on the research from the above three respects,and the main conclusion has the following several points.First,about the pricing of inflation indexed bonds: inflation indexed bonds can well resist the risk of inflation,the prices of inflation indexed bonds are positively correlated with the inflation rate and volatility,negatively correlated with the interest rate,and the influence coefficient of volatility to the price of inflation indexed bonds is bigger than the inflation rate and much bigger than the interest rate.When the expected inflation rate is higher than the interest rate,the inflation indexed bond will be issued at a premium,and the longer the term,the higher the price.Second,the introduction of inflation indexed bonds into the pension fund’s asset allocation strategy found that: pension funds invest in inflation indexed bonds can increase their expected utility,the longer the investment horizon,the higher proportion of investment in inflation indexed bonds;in the case of investment institutions withdraw the investment and management fee from the pension fund net asset,the pension fund must select the investment institution with the same risk appetite as the insured person to entrust the investment,so as to maximize the expected utility of the insured and the investment institution at the same time.In addition,the increases in the rate of wage growth can raise the future contributions of pension funds and increase the weight of investments in inflation-indexed bonds and stocks.Third,the impact of minimum return guarantee system on the pension fund asset allocation: When there is a pension fund minimum return guarantee system and profit sharing mechanism,we should choose investment institutions whose risk-aversion coefficient is less than the insured,and for investment institutions with different risk appetite should set different investment and management rates in order to maximize the expected utility of pension funds and investment institutions;the minimum return guarantee system and profit sharing mechanism can reduce the proportion of investment in risky assets,increase the expected utility of the insured;the higher the protection of the minimum return or the lower the profit sharing rate of investment institutions,the lower the proportion of investment in risky assets,so in order to protect the security of pension investment,the profit sharing rate of investment institutions should be controlled in a certain range.In addition,when the minimum return guarantee is linked with the interest rate,the longer the investment horizon or the higher the risk aversion coefficient is,the lower the proportion of investment in risky asset is.On the one hand,this study enriches and perfects the theory of option pricing and asset allocation theory in the financial field,and on the other hand,in practice it can provide diversified investment of pension funds to avoid inflation risk,obtain the minimum income guarantee,realize the value preservation and increment of pension fund,but also can provides the basis for the country to promote innovation in financial derivatives and improve the management of pension fund investment.