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Dynamic Asset Allocation with Liabilities

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  • Daniel Giamouridis
  • Athanasios Sakkas
  • Nikolaos Tessaromatis

Abstract

We develop an analytical solution to the dynamic multi†period portfolio choice problem of an investor with risky liabilities and time varying investment opportunities. We use the model to compare the asset allocation of investors who take liabilities into account, assuming time varying returns and a multi†period setting with the asset allocation of myopic ALM investors. In the absence of regulatory constraints on asset allocation weights, there are significant gains to investors who have access to a dynamic asset allocation model with liabilities. The gains are smaller under the typical funding ratio constraints faced by pension funds.

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  • Daniel Giamouridis & Athanasios Sakkas & Nikolaos Tessaromatis, 2017. "Dynamic Asset Allocation with Liabilities," European Financial Management, European Financial Management Association, vol. 23(2), pages 254-291, March.
    • Handle: RePEc:bla:eufman:v:23:y:2017:i:2:p:254-291
    DOI: 10.1111/eufm.12097
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