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Reactive investment strategies

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  • Leung, Andrew P.
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    Abstract

    Asset liability management is a key aspect of the operation of all financial institutions. In this endeavor, asset allocation is considered the most important element of investment management. Asset allocation strategies may be static, and as such are usually assessed under asset models of various degrees of complexity and sophistication. In recent years attention has turned to dynamic strategies, which promise to control risk more effectively. In this paper we present a new class of dynamic asset strategy, which respond to actual events. Hence they are referred to as [`]reactive' strategies. They cannot be characterized as a series of specific asset allocations over time, but comprise rules for determining such allocations as the world evolves. Though they depend on how asset returns and other financial variables are modeled, they are otherwise objective in nature. The resulting strategies are optimal, in the sense that they can be shown to outperform all other strategies of their type when no asset allocation constraints are imposed. Where such constraints are imposed, the strategies may be demonstrated to be almost optimal, and dramatically more effective than static strategies.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668711000266
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    Bibliographic Info

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

    Volume (Year): 49 (2011)
    Issue (Month): 1 (July)
    Pages: 89-99

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    Handle: RePEc:eee:insuma:v:49:y:2011:i:1:p:89-99

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

    Related research

    Keywords: Dynamic asset allocation Lifecycle investment Target date funds Contrarian asset allocation Dynamic optimization Calculus of variations;

    References

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    1. Zhong-Fei Li & Kai W. Ng & Ken Seng Tan & Hailiang Yang, 2006. "Optimal Constant-Rebalanced Portfolio Investment Strategies For Dynamic Portfolio Selection," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(06), pages 951-966.
    2. Best, Michael J. & Grauer, Robert R., 1990. "The efficient set mathematics when mean-variance problems are subject to general linear constraints," Journal of Economics and Business, Elsevier, vol. 42(2), pages 105-120, May.
    3. Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
    4. Huang, Hong-Chih & Lee, Yung-Tsung, 2010. "Optimal asset allocation for a general portfolio of life insurance policies," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 271-280, April.
    5. Cairns, Andrew J.G. & Blake, David & Dowd, Kevin, 2006. "Stochastic lifestyling: Optimal dynamic asset allocation for defined contribution pension plans," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 843-877, May.
    6. J. Dhaene & S. Vanduffel & M. J. Goovaerts & R. Kaas & D. Vyncke, 2005. "Comonotonic Approximations for Optimal Portfolio Selection Problems," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 253-300.
    7. Van Weert, Koen & Dhaene, Jan & Goovaerts, Marc, 2010. "Optimal portfolio selection for general provisioning and terminal wealth problems," Insurance: Mathematics and Economics, Elsevier, vol. 47(1), pages 90-97, August.
    8. Voros, J., 1986. "Portfolio analysis--an analytic derivation of the efficient portfolio frontier," European Journal of Operational Research, Elsevier, vol. 23(3), pages 294-300, March.
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