Modelling optimal trading strategy for a 2nd tier pension fund manager under iso-elastic utility function
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Date
June, 2016
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Abstract
The study sought to address portfolio optimization problem of a 2nd Tier Pension Fund
Manager in Ghana who wanted to maximize his expected utility from his terminal
wealth over all admissible trading strategies on a finite time interval. The research was
done within the framework of Iso- elastic utility functions. The novelty of this study
was that the interest rate was time dependent and was modeled within the spectral
density domain. The drift process was modeled as a Gaussian process. A Monte
Carlo simulation was considered for three stocks with a specified covariance structure
under different scenarios; (log-normal, normal and exponential) for generating the stock
prices. The main result of the simulation study indicated that, for any portfolio under
these three scenarios with a log-normally distributed stock, the fund manager should
invest larger proportion of their wealth in that stock irrespective of the level of risk
aversion coefficient. Likewise, the market data fitted depicted the same results as shown
in the simulation studies, hence, improving 2nd Tier Pension Fund Manager’s wealth
to aid the 2nd Tier Pension contributors when they went on retirement.
Description
A thesis submitted to the Department of Mathematics, Kwame
Nkrumah University of Science and Technology in partial
fulfillment of the requirement for the degree of M.Phil.
Actuarial Science