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Liability valuation and optimal asset allocation

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  • Inkmann, Joachim
  • Blake, David

Abstract

Current approaches to asset-liability management employ a sequence of distinct procedures to value liabilities and determine the asset allocation. First, a discount rate that is usually dic-tated by accounting standards is used to value liabilities. Second, the asset allocation is determined by maximizing some objective function in the surplus of assets over liabilities, taken as given the valuation of liabilities. We introduce a model that allows for the joint valuation of liabilities and the determination of the optimal asset allocation using discount rates that ap-propriately reflect default risk. We focus on the case of a defined benefit pension plan.

Suggested Citation

  • Inkmann, Joachim & Blake, David, 2004. "Liability valuation and optimal asset allocation," LSE Research Online Documents on Economics 24754, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24754
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    File URL: http://eprints.lse.ac.uk/24754/
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    References listed on IDEAS

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    10. Webb, David C., 2004. "Sponsoring company finance and investment and defined benefit pension scheme deficits," LSE Research Online Documents on Economics 24699, London School of Economics and Political Science, LSE Library.
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    Cited by:

    1. Inkmann, Joachim, 2006. "Compensating wage differentials for defined benefit and defined contribution occupational pension scheme benefits," LSE Research Online Documents on Economics 24516, London School of Economics and Political Science, LSE Library.
    2. Dirk Broeders, 2010. "Valuation of Contingent Pension Liabilities and Guarantees Under Sponsor Default Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 911-934, December.
    3. Robert Novy-Marx & Joshua D. Rauh, 2008. "The Intergenerational Transfer of Public Pension Promises," NBER Working Papers 14343, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    asset-liability management; liability valuation; asset allocation; Aurplus; default; discount rate;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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