Asset-Liability Management Under the Safety-First Principle

Under the safety-first principle (Roy in Econometrica 20:431–449, 1952), one investment goal in asset-liability (AL) management is to minimize an upper bound of the ruin probability which measures the likelihood of the final surplus being less than a given target level. We derive solutions to the safety-first AL management problem under both continuous-time and multiperiod-time settings via investigating the relationship between the safety-first AL management problem and the mean-variance AL management problem, and offer geometric interpretations. We classify investors under the safety-first principle as safety-first greedy and nongreedy investors and discuss corresponding optimal strategies for them.

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