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Dynamic asset liability management with tolerance for limited shortfalls

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  • Detemple, Jérôme
  • Rindisbacher, Marcel

Abstract

A dynamic asset allocation problem in the presence of liabilities is considered. The fund manager has von Neumann-Morgenstern preferences with terminal utility function defined over the excess of liquid wealth over a minimum liability coverage tolerated and intermediate utility function defined over dividends, the excess of expenditures over liability cash flows. Preferences incorporate a parameter controlling the tolerance for a shortfall in the funding ratio at the terminal date. The optimal asset allocation rule is derived and its sensitivity with respect to the parameters of the model is analyzed.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 43 (2008)
Issue (Month): 3 (December)
Pages: 281-294

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Handle: RePEc:eee:insuma:v:43:y:2008:i:3:p:281-294

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Web page: http://www.elsevier.com/locate/inca/505554

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References

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  1. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, Elsevier, vol. 49(1), pages 33-83, October.
  3. Steven Haberman & Elena Vigna, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," ICER Working Papers - Applied Mathematics Series, ICER - International Centre for Economic Research 09-2002, ICER - International Centre for Economic Research.
  4. Sundaresan, Suresh & Zapatero, Fernando, 1997. "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(3), pages 631-60.
  5. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2001. "Pensionmetrics: stochastic pension plan design and value-at-risk during the accumulation phase," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 187-215, October.
  6. Haberman, Steven & Vigna, Elena, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 35-69, August.
  7. Rudolf, Markus & Ziemba, William T., 2004. "Intertemporal surplus management," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(5), pages 975-990, February.
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Cited by:
  1. Delong, Lukasz, 2010. "An optimal investment strategy for a stream of liabilities generated by a step process in a financial market driven by a Lévy process," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 278-293, December.
  2. Lim, Andrew E.B. & Wong, Bernard, 2010. "A benchmarking approach to optimal asset allocation for insurers and pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 317-327, April.
  3. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph, 2009. "Managing contribution and capital market risk in a funded public defined benefit plan: Impact of CVaR cost constraints," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 25-34, August.
  4. Francisco Rivadeneyra & Oumar Dissou, 2011. "A Model of the EFA Liabilities," Discussion Papers 11-11, Bank of Canada.
  5. Andrew Ang & Bingxu Chen & Suresh Sundaresan, 2013. "Liability Investment with Downside Risk," NBER Working Papers 19030, National Bureau of Economic Research, Inc.
  6. Jarraya, Bilel & Bouri, Abdelfettah, 2013. "A Theoretical Assessment on Optimal Asset Allocations in Insurance Industry," MPRA Paper 53534, University Library of Munich, Germany, revised 2013.
  7. Ying Jiao & Olivier Klopfenstein & Peter Tankov, 2013. "Hedging under multiple risk constraints," Papers 1309.5094, arXiv.org.
  8. Gülpinar, Nalan & Pachamanova, Dessislava, 2013. "A robust optimization approach to asset-liability management under time-varying investment opportunities," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(6), pages 2031-2041.
  9. Zvi Bodie & J�r�me Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
  10. repec:nbr:nberwo:14332 is not listed on IDEAS

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