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Liability Driven Investments under a Benchmark Based Approach

Jan Baldeaux and Eckhard Platen ()

No 325, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: In this paper, we present an alternative approach as a suitable framework under which liability driven investments can be valued and hedged. This benchmark approach values both assets and liabilities consistently under the real world probability measure using the best performing portfolio, the growth optimal portfolio, as benchmark and numeraire. The benchmark approach identifies the investment strategy which is replicating a given claim at minimal cost. Should the liability under consideration be subject to nonhedgeable risk, e.g. mortality risk, benchmarked risk minimization identifies with its real world pricing formula the investment strategy which minimizes in a practical sense the price of a given claim and minimizes the benchmarked profit and loss from hedging. The application of the approach will be demonstrated for pensions. A least expensive pension scheme will be described that allows one in a fair and transparent manner to hedge in the least expensive way with minimal risk the post retirement payments for its members.

Keywords: liability driven investment; benchmark approach; least expensive pensions (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2013-02-01
New Economics Papers: this item is included in nep-age
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Citations: View citations in EconPapers (2)

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