Alternative decision models for liability-driven investment

Katharina Schwaiger (), Cormac Lucas and Gautam Mitra
Additional contact information
Katharina Schwaiger: CARISMA, Brunel University

Journal of Asset Management, 2010, vol. 11, issue 2, No 7, 178-193

Abstract: Abstract Asset and Liability Management (ALM) models have been recently recast as Liability-Driven Investment (LDI) models for making integrated financial decisions in pension schemes investment: matching and outperforming a pension plan's liabilities. LDI has become extremely popular as the decision tool of choice for pension funds. Market developments and recent accounting and regulatory changes require a pension fund to adopt a new view on their asset allocation decision. We present a generic ALM problem cast as an LDI, which we represent through a family of four decision models: a deterministic linear programming model, a two-stage stochastic programming (SP) model incorporating uncertainty, a chance-constrained SP model and an integrated chance-constrained SP model. In the deterministic model, we study the relationship between PV01 matching and the required funding. In the model, we have two sources of randomness: liabilities and interest rates. We generate interest rate scenarios using the Cox, Ingersoll and Ross model and investigate the relationship between funding requirements and minimize the absolute deviation of the present value matching of the assets and liabilities over time. In the chance-constrained programming model, we limit the number of future deficit events by introducing binary variables and a user-specified reliability level. The fourth model has integrated chance constraints, which not only limits the events of underfunding, but also the amount of underfunding relative to the liabilities. All models employ a buy-and-hold strategy in a fixed-income portfolio, whereas recourse actions are only taken in borrowing and lending.

Keywords: asset liability management; stochastic programming; pension fund investments; financial optimization (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/jam.2010.12 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:pal:assmgt:v:11:y:2010:i:2:d:10.1057_jam.2010.12

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

DOI: 10.1057/jam.2010.12

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().