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Dynamic allocation decisions in the presence of funding ratio constraints

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  • MARTELLINI, LIONEL
  • MILHAU, VINCENT

Abstract

This paper introduces a continuous-time allocation model for an investor facing stochastic liability commitments indexed with respect to inflation. In the presence of funding ratio constraints, the optimal policy is shown to involve dynamic allocation strategies that are reminiscent of portfolio insurance strategies, extended to an asset–liability management (ALM) context. Empirical tests suggest that their benefits are relatively robust with respect to changes in the objective function and the introduction of various forms of market incompleteness. We also show that the introduction of maximum funding ratio targets would allow pension funds to decrease the cost of downside liability risk protection.

Suggested Citation

  • Martellini, Lionel & Milhau, Vincent, 2012. "Dynamic allocation decisions in the presence of funding ratio constraints," Journal of Pension Economics and Finance, Cambridge University Press, vol. 11(4), pages 549-580, October.
    • Handle: RePEc:cup:jpenef:v:11:y:2012:i:04:p:549-580_00
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    Cited by:

    1. Ying Jiao & Olivier Klopfenstein & Peter Tankov, 2013. "Hedging under multiple risk constraints," Papers 1309.5094, arXiv.org.
    2. Xavier Warin, 2016. "The Asset Liability Management problem of a nuclear operator : a numerical stochastic optimization approach," Papers 1611.04877, arXiv.org.
    3. Ying Jiao & Olivier Klopfenstein & Peter Tankov, 2017. "Hedging under multiple risk constraints," Finance and Stochastics, Springer, vol. 21(2), pages 361-396, April.

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