Performance’ Improvement on Target Date Fund using GARCH Volatility Forecasting Model

February 28, 2023  |  Vol.9, No.2  |  PP. 135-144  | PDF

AUTHORS:

Sun Woong Kim, Graduate School of Business IT, Kookmin University, Korea

KEYWORDS:

Glide Path, Glosten-Jagannathan-Runkle Generalized Autoregressive Heteroskedasticity Model, Market Volatility, Sharpe Ratio, Target Date Fund

Abstract

The depletion problem of the national pension plan is emerging as life expectancy increases and the fertility rate decreases. The retirement pension system is being introduced in earnest to supplement the national pension system. The Target Date Fund, introduced to prepare for retirement, rebalances its portfolio through Glide Path, which has a fixed ratio of risky assets according to the subscriber’s life cycle. The purpose of this study was to propose a new Glide Path that simultaneously considers the life cycle and stock market volatility, and to analyze the possibility of improving the performance of the TDF portfolio through empirical analysis. To this end, we first predict stock market volatility for determining investment risk and derive a Glide Path reflecting the predicted volatility. Stock market volatility, which has the greatest influence on the new Glide Path, is predicted using the GARCH model. If the volatility is expected to increase, the TDF risk will be managed by reducing the risky assets. Results of the study using financial market data from 1987 to 2021 showed as follows. First, the asymmetric phenomenon of volatility was significant, and the usefulness of the asymmetric GARCH model was revealed. Second, the proposed Glide Path was able to lower the risk of TDF funds by lowering the risky asset incorporation ratio in the stock market crash periods such as 1998, 2008, and 2020. Third, the TDF portfolio applied to the proposed model showed higher returns and lower standard deviation, improving Sharpe Ratio. Fourth, the model proposed in the long-term investment performance showed a lower maximum draw down than the comparative model. It was revealed that the TDF performance could be improved by reflecting the market risk.

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Citations:

APA:
Kim, S. W. (2023). Performance’ Improvement on Target Date Fund using GARCH Volatility Forecasting Model. Asia-pacific Journal of Convergent Research Interchange (APJCRI), ISSN: 2508-9080 (Print); 2671-5325 (Online), KCTRS, 9(2), 135-144. doi: 10.47116/apjcri.2023.02.11

MLA:
Kim, Sun Woong, “Performance’ Improvement on Target Date Fund using GARCH Volatility Forecasting Model.” Asia-pacific Journal of Convergent Research Interchange, ISSN: 2508-9080 (Print); 2671-5325 (Online), KCTRS, vol. 9, no. 2, 2023, pp. 135-144. APJCRI, http://fucos.or.kr/journal/APJCRI/Articles/v9n2/11.html.

IEEE:
[1] S. W. Kim, “Performance’ Improvement on Target Date Fund using GARCH Volatility Forecasting Model.” Asia-pacific Journal of Convergent Research Interchange (APJCRI), ISSN: 2508-9080 (Print); 2671-5325 (Online), KCTRS, vol. 9, no. 2, pp. 135-144, February 2023.

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