A decision-dependent randomness stochastic program for asset–liability management model with a pricing decision

Miloš Kopa () and Tomáš Rusý ()
Additional contact information
Miloš Kopa: Charles University in Prague
Tomáš Rusý: Charles University in Prague

Annals of Operations Research, 2021, vol. 299, issue 1, No 12, 271 pages

Abstract: Abstract In this study, we present a stochastic programming asset–liability management model which deals with decision-dependent randomness. The model focuses on a pricing problem and the subsequent asset–liability management problem describing the typical life of a consumer loan. Such problems are frequently tackled by many companies, including multinationals. When doing so, they must consider numerous factors. These factors include the possibility of their customer rejecting the loan, the possibility of the customer defaulting on the loan and the possibility of prepayment. The randomness associated with these factors have a clear relationship with the offered interest rate of the loan which is the company’s decision and thus, induces decision-dependent randomness. Another important factor, which plays a major role for liabilities, is the price of money in the market. This is determined by the market interest rates. We captured their evolution in the form of a scenario tree. In summary, we formulated a non-linear, multi-stage stochastic program with decision-dependent randomness, which spanned the lifetime of a typical consumer loan. Its solution showed us the optimal decisions that the company should make. In addition, we performed a sensitivity analysis demonstrating the results of the model for various parameter settings that described different types of customers. Finally, we discuss the losses caused if companies do not act in the optimal way.

Keywords: Stochastic programming; Decision-dependent randomness; Asset–liability management; 90-04; 90C15; 90B50 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s10479-020-03583-y 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:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-020-03583-y

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-020-03583-y

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().