Robust Asset-Liability Management
Tjeerd de Vries and
Alexis Akira Toda
Papers from arXiv.org
Abstract:
How should financial institutions hedge their balance sheets against interest rate risk when managing long-term assets and liabilities? We address this question by proposing a bond portfolio solution based on ambiguity-averse preferences, which generalizes classical immunization and accommodates arbitrary liability structures, portfolio constraints, and interest rate perturbations. In a further extension, we show that the optimal portfolio can be computed as a simple generalized least squares problem, making the solution both transparent and computationally efficient. The resulting portfolio also reduces leverage by implicitly regularizing the portfolio weights, which enhances out-of-sample performance. Numerical evaluations using both empirical and simulated yield curves from a no-arbitrage term structure model support the feasibility and accuracy of our approach relative to existing methods.
Date: 2023-09, Revised 2025-05
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2310.00553
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