Long-term individual financial planning under stochastic dominance constraints

Giorgio Consigli (), Vittorio Moriggia () and Sebastiano Vitali ()
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Giorgio Consigli: University of Bergamo
Vittorio Moriggia: University of Bergamo
Sebastiano Vitali: University of Bergamo

Annals of Operations Research, 2020, vol. 292, issue 2, No 16, 973-1000

Abstract: Abstract We analyse an optimal goal-based households’ asset-liability management problem characterised by a real estate target and a retirement goal over a long-term planning horizon. The problem is formulated as a multistage stochastic program and we evaluate the impact of second order stochastic dominance (SSD) constraints on different specifications of a family objective function and with respect to three alternative benchmark policies. We define a stochastic linear program in which the SSD constraints are based on a double stochastic matrix, whose effectiveness in determining the decision maker strategies is studied in a case study developed in the second part of the article. We show that depending on the adopted benchmark policy, SSD constraints even if binding far on the planning horizon, may influence the root node investment decision and affect both the investment and the liability optimal policies. Based on an extended computational study we analyse under which conditions and problem formulation, an SSD condition may also imply first order stochastic dominance (FSD). Finally we analyse the relationship between the specification of a minimum shortfall objective with respect to the goals and the introduced SSD constraints at the terminal horizon.

Keywords: Dynamic stochastic programming; Stochastic dominance; Asset-liability management; Goal-based investing; Life cycle policy; Consumption-investment trade-off (search for similar items in EconPapers)
JEL-codes: C44 C61 C63 D15 G11 G22 G41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10479-019-03253-8

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