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A benchmarking approach to optimal asset allocation for insurers and pension funds

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  • Lim, Andrew E.B.
  • Wong, Bernard

Abstract

We solve the optimal asset allocation problem for an insurer or pension fund by using a benchmarking approach. Under this approach the objective is an increasing function of the relative performance of the asset portfolio compared to a benchmark. The benchmark can be, for example, a function of an insurer's liability payments, or the (either contractual or target) payments of a pension fund. The benchmarking approach tolerates but progressively penalizes shortfalls, while at the same time progressively rewards outperformance. Working in a general, possibly non-Markovian setting, a solution to the optimization problem is presented, providing insights into the impact of benchmarking on the resulting optimal portfolio. We further illustrate the results with a detailed example involving an option based benchmark of particular interest to insurers and pension funds, and present closed form solutions.

Suggested Citation

  • Lim, Andrew E.B. & Wong, Bernard, 2010. "A benchmarking approach to optimal asset allocation for insurers and pension funds," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 317-327, April.
  • Handle: RePEc:eee:insuma:v:46:y:2010:i:2:p:317-327
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    2. Jan Baldeaux & Fung & Katja Ignatieva & Eckhard Platen, 2015. "A Hybrid Model for Pricing and Hedging of Long-dated Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(4), pages 366-398, September.
    3. Kamma, Thijs & Pelsser, Antoon, 2022. "Near-optimal asset allocation in financial markets with trading constraints," European Journal of Operational Research, Elsevier, vol. 297(2), pages 766-781.
    4. Yueyang Zheng & Jingtao Shi, 2020. "A Stackelberg Game of Backward Stochastic Differential Equations with Applications," Dynamic Games and Applications, Springer, vol. 10(4), pages 968-992, December.

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