Mismatch risk preferences Sample Clauses

Mismatch risk preferences. ‌ In the life cycles provided by NN, the pension plan participant will be assigned to an asset allocation strategy based on the risk preferences. In particular, XX offers a defensive, neutral and offensive life cycle strategy. Relatively few participants make an active choice (NN PPI), hence they will be assigned to the default. Based on financial market conditions, in particular low interest rates, NN decided to offer the neutral risk profile as the default. It might be relevant to quantify welfare losses that arise from assuming an incorrect risk profile. Still, deriving the optimal asset allocation based on the risk preferences in the pension contract will be even more relevant. The life cycles of NN could be related to the life cycles prescribed by the Merton model. The life cycles of NN will be calibrated for the appropriate level of risk aversion (γ), see equation (12). Still, the risk aversion in the Merton setting that estimates the appropriate NN life cycle will not exactly match. This we will neglect and match as good as possible. In addition to this, by choosing the level of risk aversion, we will take into account that realistic expected pension contributions are made to the individual pension account (i.e. calibrate on pension contributions as well). Calibrating the life cycles for the appropriate risk aversion level yields risk aversion parameters of 20, 10 and 5 for the defensive, neutral and offensive asset allocation strategy respectively. In Binswanger and Schunk (2008) [10], it was shown that in the Dutch setting the 25 %, 50 % and 75 % quantile of the risk preference distribution corresponds with risk preference parameters of 4, 7 and 12 respectively. In Xxx Xxxxx, Kool and Xxxxx (2007) [43], it was concluded that the risk preferences were highest in the pension domain. Therefore, it will be argued that the life cycles will represent the distribution of risk preferences accurately. In Figure 6, the median unbounded (i.e. no exogenous borrowing constraint) and the median bounded (i.e. truncated) asset allocation strategies for these values of the risk preferences are presented. These were derived in the standard Merton setting (see Subsection 2.1). Risk aversion 5 (Median) Risk aversion 10 (Median) Risk aversion 20 (Median) Risk aversion 5 (Median) Risk aversion 10 (Median) Risk aversion 20 (Median) 3.5 1 fraction of financial wealth in stocks 0.9 fraction of financial wealth in stocks 0.8 0.7 1.5 0.6 0.5 0.4 1 0.3 0 20 30 40 50 60 70 80...
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