Dynamic stochastic programming for asset-liability management

G Consigli and M.A.H. Dempster

No 04/95, Finance Research Papers from University of Cambridge, The Judge Institute

Abstract: Multistage stochastic programming -- in contrast to stochastic control -- has found wide application in the formulation and solution of financial problems characterized by a large number of state variables and a generally low number of possible decision stages. The literature on the use of multistage recourse modelling to formalize complex portfolio optimization problems dates back to the early seventies, when the technique was first adopted to solve a fixed interest security portfolio problem. We present here the CALM model which has been designed to deal with uncertainty affecting both assets (in either the portfolio or the market) and liabilities (in the form of scenario dependent payments or borrowing costs). Specifically, we consider a pension fund problem in which portfolio rebalancing is allowed over a long-term horizon at discrete time points and where liabilities refer to five different classes of pension contracts. The portfolio manager, given an initial wealth, seeks the maximization of terminal wealth at the horizon, with investment returns modelled as discrete state random vectors. Decision vectors represent possible investments in the market and holding or selling assets in the portfolio, as well as borrowing decisions from a credit line or deposits with a bank. Computational results are presented for a set of 10-stage portfolio problems using different solution methods and libraries (OSL, CPLEX, OB1).The portfolio problem with an underlying vector data process which allows up to 2688 realizationsat the 10 year horizon is solved on an IBM RS6000/590 for a set of twenty four large scale test problems using the simplex and barrier methods provided by CPLEX (the latter for either linear or quadratic objective), the predictor/corrector interior point method provided in OB1, the simplex method of OSL, the MSLiP-OSL code instantiating nested Benders decomposition with subproblem solution using OSL simplex and the current version of MSLiP.

References: Add references at CitEc
Citations:

Downloads: (external link)
ftp://mibm2.jims.cam.ac.uk/pub/PAPERS/04_95.ps.gz (application/postscript)
Our link check indicates that this URL is bad, the error code is: 500 Failed to connect to FTP server mibm2.jims.cam.ac.uk: No such host is known.

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:wuk:cajirp:0495

Access Statistics for this paper

More papers in Finance Research Papers from University of Cambridge, The Judge Institute Contact information at EDIRC.
Bibliographic data for series maintained by WoPEc Project ().