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A Benchmarking Approach to Optimal Asset Allocation for Insurers and Pension Funds
Bernard Wong University of New South Wales - School of Actuarial Studies Andrew Lim University of California, Berkeley November 3, 2009 Australian School of Business Research Paper No. 2009ACTL07 Abstract: We solve the optimal asset allocation problem for an insurer or pension fund by using a benchmarking approach. Under this approach the objective is an increasing function of the relative performance of the asset portfolio compared to a benchmark. The benchmark can be, for example, a function of an insurer's liability payments, or the (either contractual or target) payments of a pension fund. The benchmarking approach tolerates but progressively penalizes shortfalls, while at the same time progressively rewarding out-performance. Working in a general, possibly non-Markovian setting, a solution to the optimization problem is presented, providing insights as to the impact of benchmarking on the resulting optimal portfolio.
Keywords: Asset-Liability Management, Portfolio Optimization, Benchmarking JEL Classifications: C61, G11 Working Paper SeriesDate posted: August 14, 2009 ; Last revised: November 06, 2009Suggested CitationContact Information
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