IDEAS home Printed from https://ideas.repec.org/p/ise/remwps/wp01592021.html
   My bibliography  Save this paper

Asset Liability Management: Evidence from the Banco de Portugal defined benefit pension fund

Author

Listed:
  • Maria Teresa Medeiros Garcia
  • Liane Costa Gabriel

Abstract

The level of financing of pension fundsand the inherent risk of default is an issue which has assumed increasing relevance, due to the difficulties that pension funds have beenfacingover recent years, which mainly result from changes in demographic conditions, such as the ageingof the populationand increasing longevity, compounded by the 2008 financial crisis and the Great Recession. Asset Liability Management (ALM) models can be employed to optimiseassetsandliabilities, and at the same time minimisethe risks of a fund, whereby the choice of the best model for a fund dependson the fund’sspecificcharacteristics and risk-return profile. This paper is mainly a theoretical study, where a literature reviewis first carried out both on pension plans and pension funds and alsoon the importance of ALM.This is followed by an analysis of the evolution of this risk management instrument and a description of the selected modelsis then presented. To conclude, an analysis of the application of ALM fora pension fund, the Banco de Portugal defined benefit pension fund, is carried out.

Suggested Citation

  • Maria Teresa Medeiros Garcia & Liane Costa Gabriel, 2021. "Asset Liability Management: Evidence from the Banco de Portugal defined benefit pension fund," Working Papers REM 2021/0159, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp01592021
    as

    Download full text from publisher

    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0159_2021.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Youssouf A. F. Toukourou & Franc{c}ois Dufresne, 2015. "ON Integrated Chance Constraints in ALM for Pension Funds," Papers 1503.05343, arXiv.org.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    3. 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.
    4. Maria Teresa Medeiros Garcia, 2017. "Overview of the Portuguese Three Pillar Pension System," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(2), pages 175-189, May.
    5. Sandra Blome & Kai Fachinger & Dorothee Franzen & Gerhard Scheuenstuhl & Juan Yermo, 2007. "Pension Fund Regulation and Risk Management: Results from an ALM Optimisation Exercise," OECD Working Papers on Insurance and Private Pensions 8, OECD Publishing.
    6. Frederick R. Macaulay, 1938. "Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856," NBER Books, National Bureau of Economic Research, Inc, number maca38-1, June.
    7. M. I. Kusy & W. T. Ziemba, 1986. "A Bank Asset and Liability Management Model," Operations Research, INFORMS, vol. 34(3), pages 356-376, June.
    8. Robert van der Meer & Meye Smink, 1993. "Strategies and Techniques for Asset-Liability Management: an Overview," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 18(2), pages 144-157, April.
    9. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(3), pages 279-292, September.
    10. G. Consigli & M. Dempster, 1998. "Dynamic stochastic programmingfor asset-liability management," Annals of Operations Research, Springer, vol. 81(0), pages 131-162, June.
    11. Emmanouil Platanakis & Charles Sutcliffe, 2017. "Asset–liability modelling and pension schemes: the application of robust optimization to USS," The European Journal of Finance, Taylor & Francis Journals, vol. 23(4), pages 324-352, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christopher Bayliss & Marti Serra & Armando Nieto & Angel A. Juan, 2020. "Combining a Matheuristic with Simulation for Risk Management of Stochastic Assets and Liabilities," Risks, MDPI, vol. 8(4), pages 1-14, December.
    2. Luís Oliveira & João Vidal Nunes & Luís Malcato, 2014. "The performance of deterministic and stochastic interest rate risk measures:," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(3), pages 141-165, December.
    3. ManMohan S. Sodhi, 2005. "LP Modeling for Asset-Liability Management: A Survey of Choices and Simplifications," Operations Research, INFORMS, vol. 53(2), pages 181-196, April.
    4. Arjan Berkelaar & Roy Kouwenberg, 2011. "A Liability-Relative Drawdown Approach to Pension Asset Liability Management," Palgrave Macmillan Books, in: Gautam Mitra & Katharina Schwaiger (ed.), Asset and Liability Management Handbook, chapter 14, pages 352-382, Palgrave Macmillan.
    5. Cláudia Simões & Luís Oliveira & Jorge M. Bravo, 2021. "Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits," Risks, MDPI, vol. 9(4), pages 1-28, March.
    6. Platanakis, Emmanouil & Sutcliffe, Charles & Ye, Xiaoxia, 2021. "Horses for courses: Mean-variance for asset allocation and 1/N for stock selection," European Journal of Operational Research, Elsevier, vol. 288(1), pages 302-317.
    7. Long H. Vo, 2014. "Application of Kalman Filter on modelling interest rates," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 1(1), pages 1-15, March.
    8. Marco Di Francesco & Roberta Simonella, 2023. "A stochastic Asset Liability Management model for life insurance companies," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 37(1), pages 61-94, March.
    9. Jacek Gondzio & Roy Kouwenberg, 2001. "High-Performance Computing for Asset-Liability Management," Operations Research, INFORMS, vol. 49(6), pages 879-891, December.
    10. Guidolin, Massimo & Thornton, Daniel L., 2018. "Predictions of short-term rates and the expectations hypothesis," International Journal of Forecasting, Elsevier, vol. 34(4), pages 636-664.
    11. Roncoroni, Andrea & Galluccio, Stefano & Guiotto, Paolo, 2010. "Shape factors and cross-sectional risk," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2320-2340, November.
    12. Messina, E. & Mitra, G., 1997. "Modelling and analysis of multistage stochastic programming problems: A software environment," European Journal of Operational Research, Elsevier, vol. 101(2), pages 343-359, September.
    13. Stephen A. Buser & G. Andrew Karolyi & Anthony B. Sanders, "undated". "Adjusted Forward Rates as Predictors of Future Spot Rates," Research in Financial Economics 9605, Ohio State University.
    14. Gatzert, Nadine & Martin, Michael, 2012. "Quantifying credit and market risk under Solvency II: Standard approach versus internal model," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 649-666.
    15. Adrian, Tobias, 2017. "Risk Management and Regulation," CEPR Discussion Papers 12422, C.E.P.R. Discussion Papers.
    16. Newton, David & Platanakis, Emmanouil & Stafylas, Dimitrios & Sutcliffe, Charles & Ye, Xiaoxia, 2021. "Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach," The British Accounting Review, Elsevier, vol. 53(5).
    17. Libo Yin & Liyan Han, 2013. "Options strategies for international portfolios with overall risk management via multi-stage stochastic programming," Annals of Operations Research, Springer, vol. 206(1), pages 557-576, July.
    18. Barro, Diana & Canestrelli, Elio, 2005. "Dynamic portfolio optimization: Time decomposition using the Maximum Principle with a scenario approach," European Journal of Operational Research, Elsevier, vol. 163(1), pages 217-229, May.
    19. Robert Ferstl & Alex Weissensteiner, 2010. "Cash management using multi-stage stochastic programming," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 209-219.
    20. Roberds, William & Whiteman, Charles H., 1999. "Endogenous term premia and anomalies in the term structure of interest rates: Explaining the predictability smile," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 555-580, December.

    More about this item

    Keywords

    Pension Funds; Pension Plans; Asset Liability Management; Risk Management; Funding Ratio;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ise:remwps:wp01592021. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sandra Araújo (email available below). General contact details of provider: https://rem.rc.iseg.ulisboa.pt/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.