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Optimal Asset Allocation in Asset Liability Management

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  • Jules H. van Binsbergen
  • Michael W. Brandt
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    Abstract

    We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12970.

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    Date of creation: Mar 2007
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    Handle: RePEc:nbr:nberwo:12970

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    Cited by:
    1. Brière, Marie & Signori, Ombretta, 2011. "Inflation-hedging Portfolios in Different Regimes," Economics Papers from University Paris Dauphine 123456789/7744, Paris Dauphine University.
    2. Marie Brière & Ombretta Signori, 2011. "Inflation hedging portfolios in different regimes," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163 Bank for International Settlements.
    3. Bodie, Zvi & Brière, Marie, 2013. "Sovereign Wealth and Risk Management. A New Framework for Optimal Asset Allocation of Sovereign Wealth," Economics Papers from University Paris Dauphine 123456789/7874, Paris Dauphine University.
    4. Signori, Ombretta & Brière, Marie, 2012. "Inflation-Hedging Portfolios : Economic Regimes Matter," Economics Papers from University Paris Dauphine 123456789/9296, Paris Dauphine University.
    5. Angelidis, Timotheos & Tessaromatis, Nikolaos, 2010. "The efficiency of Greek public pension fund portfolios," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2158-2167, September.

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