Net Contribution, Liquidity, and Optimal Pension Management

This paper presents an optimal portfolio balancing strategy for a pension fund manager in the presence of fixed and proportional transaction costs for trading stocks and changes in net contribution. An analytic solution to the one-period problem is presented and a heuristic method for a multi-period problem is developed. For reasonably-calibrated parameters, we find that our numerical results explain the actual asset allocation schemes of some internationally-renowned pension funds well. Furthermore, we also find that net contribution and liquidity have significant impacts on the theoretical optimal asset allocation of a pension fund