We discuss business cycle effects on the management of a trust fund set up to provide regular income on a continuing basis. Fund managers must find a balance between short-term and long-term variability of income. In our model the managers know that the expected return is mean-reverting, but they have limited capability of learning the true current state of the cycle. We consider policies that are optimal under constant relative risk aversion, and we contrast these with a parametric class of policies in which the asset mix is fixed and the estimated business cycle variable is only used in the consumptiondecision. In a calibration exercise, we ¯nd that optimal decisions are based on an exponentially weighted history of past asset returns with a half-time of about seven years. The tradeoff between short-term and long-term variability of income is illustrated by simulation results.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.


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