Liability Driven Investments under a Benchmark Based Approach
In this paper, we present an alternative approach as a suitable framework under which liability driven investments can be valued and hedged. This benchmark approach values both assets and liabilities consistently under the real world probability measure using the best performing portfolio, the growth optimal portfolio, as benchmark and numeraire. The benchmark approach identifies the investment strategy which is replicating a given claim at minimal cost. Should the liability under consideration be subject to nonhedgeable risk, e.g. mortality risk, benchmarked risk minimization identifies with its real world pricing formula the investment strategy which minimizes in a practical sense the price of a given claim and minimizes the benchmarked profit and loss from hedging. The application of the approach will be demonstrated for pensions. A least expensive pension scheme will be described that allows one in a fair and transparent manner to hedge in the least expensive way with minimal risk the post retirement payments for its members.
|Date of creation:||01 Feb 2013|
|Date of revision:|
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- Eckhard Platen, 2006.
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Wiley Blackwell, vol. 16(1), pages 131-151.
- Truc Le & Eckhard Platen, 2006.
"Approximating the growth optimal portfolio with a diversified world stock index,"
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Emerald Group Publishing, vol. 7(5), pages 559-574, November.
- Truc Le & Eckhard Platen, 2006. "Approximating the Growth Optimal Portfolio with a Diversified World Stock Index," Research Paper Series 184, Quantitative Finance Research Centre, University of Technology, Sydney.
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"A minimal financial market model,"
SFB 373 Discussion Papers
2000,91, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Eckhard Platen & Hardy Hulley, 2008. "Hedging for the Long Run," Research Paper Series 214, Quantitative Finance Research Centre, University of Technology, Sydney.
- Eckhard Platen, 2009. "Real World Pricing of Long Term Contracts," Research Paper Series 262, Quantitative Finance Research Centre, University of Technology, Sydney.
- Henry Allen Latane, 1959. "Criteria for Choice Among Risky Ventures," Journal of Political Economy, University of Chicago Press, vol. 67, pages 144.
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