Mean-Variance Asset Liability Management with State-Dependent Risk Aversion

Yan Zhang, Yonghong Wu, Shuang Li and Benchawan Wiwatanapataphee

North American Actuarial Journal, 2017, vol. 21, issue 1, 87-106

Abstract: This article investigates the asset liability management problem with state-dependent risk aversion under the mean-variance criterion. The investor allocates the wealth among multiple assets including a risk-free asset and multiple risky assets governed by a system of geometric Brownian motion stochastic differential equations, and the investor faces the risk of paying uncontrollable random liabilities. The state-dependent risk aversion is taken into account in our model, linking the risk aversion to the current wealth held by the investor. An extended Hamilton-Jacobi-Bellman system is established for the optimization of asset liability management, and by solving the extended Hamilton-Jacobi-Bellman system, the analytical closed-form expressions for the time-inconsistent optimal investment strategies and the optimal value function are derived. Finally, numerical examples are presented to illustrate our results.

Date: 2017
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DOI: 10.1080/10920277.2016.1247719

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