Mei-Ling Tang

To ensure the success of a pension plan under a self-contained defined contribution (DC) retirement plan, the inclusion of foreign assets in a local pension portfolio could be beneficial for risk diversification and the efficient improvement of a fund’s investment performance during its accumulation phase. This study focuses on developing international asset allocation criteria for a DC pension plan; accordingly, we consider risk exposure relative to stochastic interest rates and ex- change rates with minimum guarantees. An arbitrage-free framework, namely, the cross-currency Heath–Jarrow–Morton interest rate model, is introduced in dynamic optimization programming for the DC pension fund. The proposed solution based on the generalized stochastic framework provides tractable and appropriate criteria for the dynamic allocation of a DC pension fund. The constituents of the optimal solution can reflect changes in investment lifecycles and shifts in risk preferences during the accumulation phase of a DC pension plan.

The Black–Litterman (BL) model allows investors to apply their subjective views to asset allocation optimisation. In this study, we construct a multi-asset allocation portfolio of iShares exchange traded funds (ETFs) using mean–variance (MV) and BL models. Two investment strategies, namely lump-sum investment and a systematic investment plan (SIP), are also investigated and applied to ETF portfolios. On the basis of a momentum strategy, three subjective views of investors are developed for the BL model. The contributions of this empirical study are threefold. First, under the SIP strategy, BL portfolios outperform the MV portfolio in terms of cumulative values, even when an investment starts with bad market timing (i.e., 2008). Second, the asset allocation weights of BL portfolios are demonstrated to be closely related to investors’ subjective views and significantly different from those of the MV portfolio. Third, the three BL portfolios constructed on the basis of the momentum strategy exhibit similar performance patterns in their cumulative returns during the period from 2008 to mid-2021, indicating that investors’ views are consistently reflected in the BL portfolios and consequently contribute to the similarity of the portfolios’ performance as they share similarities in the application of momentum strategies.