Robust Asset-Liability Management

Tjeerd de Vries and Alexis Akira Toda

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Abstract: How should financial institutions hedge their balance sheets against interest rate risk when they have long-term assets and liabilities? Using the perspective of functional and numerical analysis, we propose a model-free bond portfolio selection method that generalizes classical immunization and accommodates arbitrary liability structure, portfolio constraints, and perturbations in interest rates. We prove the generic existence of an immunizing portfolio that maximizes the worst-case equity with a tight error estimate and provide a solution algorithm. Numerical evaluations using 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
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