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Robust Asset-Liability Management

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  • Tjeerd de Vries
  • Alexis Akira Toda

Abstract

How should financial institutions hedge their balance sheets against interest rate risk when they have long-term assets and liabilities? Using the perspective of functional and numerical analysis, we propose a model-free bond portfolio selection method that generalizes classical immunization and accommodates arbitrary liability structure, portfolio constraints, and perturbations in interest rates. We prove the generic existence of an immunizing portfolio that maximizes the worst-case equity with a tight error estimate and provide a solution algorithm. Numerical evaluations using empirical and simulated yield curves from a no-arbitrage term structure model support the feasibility and accuracy of our approach relative to existing methods.

Suggested Citation

  • Tjeerd de Vries & Alexis Akira Toda, 2023. "Robust Asset-Liability Management," Papers 2310.00553, arXiv.org.
    • Handle: RePEc:arx:papers:2310.00553
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    References listed on IDEAS

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    1. Fong, H Gifford & Vasicek, Oldrich A, 1984. "A Risk Minimizing Strategy for Portfolio Immunization," Journal of Finance, American Finance Association, vol. 39(5), pages 1541-1546, December.
    2. Chambers, Donald R. & Carleton, Willard T. & McEnally, Richard W., 1988. "Immunizing Default-Free Bond Portfolios with a Duration Vector," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 89-104, March.
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