Dynamic asset-liability management with frictions

Tingjin Yan, Jinhui Han, Guiyuan Ma and Chi Chung Siu

Insurance: Mathematics and Economics, 2023, vol. 111, issue C, 57-83

Abstract: This paper studies a dynamic asset-liability management problem of a company with market frictions. Specifically, the asset prices are modeled by a multivariate geometric Brownian motion with their excess returns driven by some correlated stochastic signals; and the liability process is modeled by another geometric Brownian motion correlated to the asset price dynamics. The company trades dynamically to offset the risks from its liability and each trade induces both temporary and persistent price impacts. We characterize the optimal trading strategies in terms of the solutions to the coupled matrix Riccati differential systems. Due to the price impacts, the company should adopt a target-chasing strategy in which the dynamic target portfolio is expressed in terms of the return-predicting signals and realized liability. We also derive some sufficient conditions, based on the model parameters alone, to ensure the well-posedness of the coupled Riccati systems. Our numerical results indicate that the temporary and persistent price impacts have opposite implications on the company's trading behavior. While the temporary price impact slows down the company's trading speed toward the target portfolio, the persistent price impact may encourage the company to trade more aggressively to enhance the expected returns.

Keywords: Asset-liability management; Temporary and persistent price impacts; Return predictability; Target-chasing strategy; Coupled matrix Riccati differential system (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167668723000252
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:111:y:2023:i:c:p:57-83

DOI: 10.1016/j.insmatheco.2023.03.001

Access Statistics for this article

Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

More articles in Insurance: Mathematics and Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().