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Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

Author

Listed:
  • Areski Cousin

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Ying Jiao

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, ISFA - Institut de Science Financière et d'Assurances)

  • Christian Yann Robert

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Olivier David Zerbib

    (CREST - Center for Research in Extreme Scale Technologies [Bloomington] - Indiana University [Bloomington] - Indiana University System, IP Paris - Institut Polytechnique de Paris, ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris)

Abstract

This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. In accounting for the asset-liability mismatch risk of the institution, we present a general utility optimization problem in a discrete-time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate, and credit intensity fluctuations, and show by numerical results that the optimal strategy improves both the solvency and asset returns of the institution compared to a standard institutional investor's asset allocation.

Suggested Citation

  • Areski Cousin & Ying Jiao & Christian Yann Robert & Olivier David Zerbib, 2022. "Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints," Post-Print hal-05415071, HAL.
    • Handle: RePEc:hal:journl:hal-05415071
    DOI: 10.3390/risks1010015
    Note: View the original document on HAL open archive server: https://hal.science/hal-05415071v1
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    References listed on IDEAS

    as
    1. Kalkbrener, Michael & Willing, Jan, 2004. "Risk management of non-maturing liabilities," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1547-1568, July.
    2. Wang, JinDong & Xu, Wei, 2020. "Risk-Based Capital For Variable Annuity Under Stochastic Interest Rate," ASTIN Bulletin, Cambridge University Press, vol. 50(3), pages 959-999, September.
    3. El Karoui, Nicole & Jeanblanc, Monique & Lacoste, Vincent, 2005. "Optimal portfolio management with American capital guarantee," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 449-468, March.
    4. Frauendorfer, Karl & Schurle, Michael, 2003. "Management of non-maturing deposits by multistage stochastic programming," European Journal of Operational Research, Elsevier, vol. 151(3), pages 602-616, December.
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