Asset-Liability Management Under Time-Varying Investment Opportunities

In this paper, we propose multi-stage stochastic linear programming for asset-liability management under time-varying investment opportunities. We use a first-order unrestricted vector autoregressive process to model predictability in the asset returns and the state variables, where - additional to equity returns and dividend-price ratios - Nelson/Siegel parameters are included to account for the evolution of the yield curve. As objective function we minimize conditional value at risk of the shareholder value, i.e. the difference between the mark-to-market value of (financial) assets and the present value of future liabilities. Our results indicate strong hedging demands to mitigate interest rate risks.

[1]  M. Hanke,et al.  Scenario Trees, Arbitrage, and Multi-Asset ALM Models , 2009 .

[2]  Eduardo S. Schwartz,et al.  Strategic asset allocation , 1997 .

[3]  Georg Ch. Pflug.  Optimal scenario tree generation for multiperiod financial planning , 2001 .

[4]  N. Barberis.  Investing for the Long Run When Returns are Predictable , 2000 .

[5]  J. Detemple,et al.  A Monte Carlo Method for Optimal Portfolios , 2000 .

[6]  Stavros A. Zenios,et al.  Risk factor analysis and portfolio immunization in the corporate bond market , 2005, Eur. J. Oper. Res..

[7]  William T. Ziemba,et al.  The Innovest Austrian Pension Fund Financial Planning Model InnoALM , 2008, Oper. Res..

[8]  Ts Kim,et al.  Dynamic Nonmyopic Portfolio Behavior , 1994 .

[9]  C. Boender,et al.  A Scenario approach of ALM , 2008 .

[10]  David Johannes Wüpper,et al.  An empirical analysis , 2015 .

[11]  Philippe Artzner,et al.  Coherent Measures of Risk , 1999 .

[12]  R. Rockafellar,et al.  Optimization of conditional value-at risk , 2000 .

[13]  A. Lo,et al.  THE ECONOMETRICS OF FINANCIAL MARKETS , 1996, Macroeconomic Dynamics.

[14]  Stein W. Wallace,et al.  Generating Scenario Trees for Multistage Decision Problems , 2001, Manag. Sci..

[15]  Jacek Gondzio,et al.  High-Performance Computing for Asset-Liability Management , 2001, Oper. Res..

[16]  G. C. Tiao,et al.  An introduction to multiple time series analysis. , 1993, Medical care.

[17]  Luis M. Viceira,et al.  Strategic Asset Allocation in a Continuous-Time VAR Model , 2002 .

[18]  Werner Römisch,et al.  Scenario Reduction Algorithms in Stochastic Programming , 2003, Comput. Optim. Appl..

[19]  John M. Mulvey,et al.  Applying CVaR for decentralized risk management of financial companies , 2006 .

[20]  R. C. Merton,et al.  Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case , 1969 .

[21]  C. Mitchell Conover.  Stock Return Predictability: Is It There? , 2007 .

[22]  Luis M. Viceira,et al.  Consumption and Portfolio Decisions When Expected Returns are Time Varying , 1996 .

[23]  P. Samuelson.  LIFETIME PORTFOLIO SELECTION BY DYNAMIC STOCHASTIC PROGRAMMING , 1969 .

[24]  R. C. Merton,et al.  Optimum Consumption and Portfolio Rules in a Continuous-Time Model* , 1975 .

[25]  J. Cochrane,et al.  Bond Risk Premia , 2002 .

[26]  Stan Uryasev,et al.  Generalized deviations in risk analysis , 2004, Finance Stochastics.

[27]  B. Scherer,et al.  Varying risk premia in international bond markets , 2009 .

[28]  S. Zenios,et al.  Asset and liability management for insurance products with minimum guarantees: The UK case , 2006 .

[29]  S. B. Thompson,et al.  Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average? , 2008 .

[30]  Yihong Xia.  Learning About Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation , 2000 .

[31]  S. Uryasev.  Probabilistic constrained optimization : methodology and applications , 2000 .

[32]  Pieter Klaassen,et al.  Comment on "Generating Scenario Trees for Multistage Decision Problems" , 2002, Manag. Sci..

[33]  Andrew Ang,et al.  Stock Return Predictability: Is it There? , 2001 .

[34]  Donald B. Keim,et al.  Predicting returns in the stock and bond markets , 1986 .

[35]  R. Rockafellar,et al.  Conditional Value-at-Risk for General Loss Distributions , 2001 .

[36]  F. Diebold,et al.  Forecasting the Term Structure of Government Bond Yields , 2002 .

[37]  R. C. Merton,et al.  Optimum consumption and portfolio rules in a continuous - time model Journal of Economic Theory 3 , 1971 .

[38]  Michal Kaut,et al.  A Heuristic for Moment-Matching Scenario Generation , 2003, Comput. Optim. Appl..

[39]  Bas J. M. Werker,et al.  When Can Life Cycle Investors Benefit from Time-Varying Bond Risk Premia? , 2010 .

[40]  Vikram K. Srimurthy,et al.  An Empirical Analysis of 130/30 Strategies , 2007 .

[41]  M. Dempster,et al.  Global Asset Liability Management , 2003, British Actuarial Journal.

[42]  Jonathan H. Wright,et al.  Bond Risk Premia and Realized Jump Risk , 2009 .

[43]  I. Welch,et al.  A Comprehensive Look at the Empirical Performance of Equity Premium Prediction II , 2004, SSRN Electronic Journal.

[44]  A. Siegel,et al.  Parsimonious modeling of yield curves , 1987 .

[45]  Anna Grazia Quaranta,et al.  Robust optimization of conditional value at risk and portfolio selection , 2008 .

[46]  William T. Ziemba,et al.  Handbook of Asset and Liability Management - Set , 2007 .

[47]  R. Shiller,et al.  The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors , 1986 .

[48]  S. Zenios,et al.  Pricing options on scenario trees , 2008 .

[49]  Jessica A. Wachter.  Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets , 2001, Journal of Financial and Quantitative Analysis.

[50]  W. Ziemba,et al.  The Russell-Yasuda Kasai Model: An Asset/Liability Model for a Japanese Insurance Company Using Multistage Stochastic Programming , 1994 .