Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

Areski Cousin, Ying Jiao, Christian Yann Robert and Olivier Zerbib
Additional contact information
Areski Cousin: Institut de Recherche en Mathématique Avancée, Université de Strasbourg, 7 rue René Descartes, 67084 Strasbourg, France
Ying Jiao: Institut de Science Financière et d’Assurances, Université Claude Bernard Lyon 1, 50 Avenue Tony Garnier, 69007 Lyon, France
Christian Yann Robert: ENSAE IPP, 5 Avenue Le Chatelier, 91120 Palaiseau, France

Risks, 2022, vol. 10, issue 1, 1-28

Abstract: This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. In accounting for the asset-liability mismatch risk of the institution, we present a general utility optimization problem in a discrete-time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate, and credit intensity fluctuations, and show by numerical results that the optimal strategy improves both the solvency and asset returns of the institution compared to a standard institutional investor’s asset allocation.

Keywords: asset allocation; asset-liability management; withdrawal risk; liquidity risk; utility maximization (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints (2022)
Working Paper: Optimal asset allocation subject to withdrawal risk and solvency constraints (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:10:y:2022:i:1:p:15-:d:719425

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