ROBUST OPTIMAL INVESTMENT STRATEGY FOR A DC PENSION PLAN IN THE MARKET WITH MISPRICING AND CONSTANT ELASTICITY OF VARIANCE

This paper considers an optimal asset allocation problem for a de -fined contribution pension fund in a continuous time setting, and the manager is concerned about potential model misspecification. We suppose that the fi-nancial market consists of one risk-free asset, one market index fund whose price satisfies the constant elasticity of variance model, and a pair of risky as-sets with mispricing. Under the objective of maximizing the expected utility of the pension fund wealth at the retirement, the closed form expressions of the robust optimal investment strategy and the corresponding value function are obtained by using the stochastic control theory. Finally, some numerical examples are given to compare the difference between the ambiguity averse and the ambiguity neutral strategies, and to investigate the effect of relevant parameters on the strategy. We find that the optimal investment strategy is not a long-short symmetric strategy when the mispricing assets have different mispricing correct capability, and it will lead to significant utility loss for the manager if the model uncertainty risk is ignored.