Dynamic Asset Allocation with Liabilities
Athens University of Economics and Business; City University London - Sir John Cass Business School
Athens University of Economics and Business - Department of Accounting and Finance
EDHEC Business School and EDHEC Risk Institute
May 2, 2012
We develop an analytical solution to the dynamic multi-period portfolio choice problem of an investor endowed with power utility defined over the funding ratio (the ratio of Assets over Liabilities) at a finite horizon, under time-varying investment opportunities. Our model produces different asset allocations relative to a dynamic asset allocation model that does not account for investors’ liabilities and also relative to a myopic model that accounts for investors’ liabilities. The differences in asset allocations translate to large economic benefits for investors pursuing Asset Liability Management with the proposed model. We argue that these benefits arise because our model explicitly incorporates investors’ liabilities but also because it exploits the predictability of investment opportunities’ variation.
Number of Pages in PDF File: 45
Keywords: Strategic Asset Allocation, Dynamic Asset Allocation, Asset–Liability Management
JEL Classification: G11, G12, G23working papers series
Date posted: May 3, 2012 ; Last revised: May 30, 2012
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