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Dynamic asset liability management with tolerance for limited shortfalls

  • Detemple, Jérôme
  • Rindisbacher, Marcel

A dynamic asset allocation problem in the presence of liabilities is considered. The fund manager has von Neumann-Morgenstern preferences with terminal utility function defined over the excess of liquid wealth over a minimum liability coverage tolerated and intermediate utility function defined over dividends, the excess of expenditures over liability cash flows. Preferences incorporate a parameter controlling the tolerance for a shortfall in the funding ratio at the terminal date. The optimal asset allocation rule is derived and its sensitivity with respect to the parameters of the model is analyzed.

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

Volume (Year): 43 (2008)
Issue (Month): 3 (December)
Pages: 281-294

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Handle: RePEc:eee:insuma:v:43:y:2008:i:3:p:281-294
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  1. Steven Haberman & Elena Vigna, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," ICER Working Papers - Applied Mathematics Series 09-2002, ICER - International Centre for Economic Research.
  2. Haberman, Steven & Vigna, Elena, 2002. "Optimal investment strategies and risk measures in defined contribution pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 35-69, August.
  3. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2001. "Pensionmetrics: stochastic pension plan design and value-at-risk during the accumulation phase," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 187-215, October.
  4. Sundaresan, Suresh & Zapatero, Fernando, 1997. "Valuation, Optimal Asset Allocation and Retirement Incentives of Pension Plans," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 631-60.
  5. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  6. Rudolf, Markus & Ziemba, William T., 2004. "Intertemporal surplus management," Journal of Economic Dynamics and Control, Elsevier, vol. 28(5), pages 975-990, February.
  7. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
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