Optimal Asset Allocation in Asset Liability Management
Jules H. Van Binsbergen
Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)
Michael W. Brandt
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
EFA 2007 Ljubljana Meetings Paper
We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.
Number of Pages in PDF File: 37
Keywords: Dynamic portfolio choice, pension plans
JEL Classification: G0, G11, G23, G28working papers series
Date posted: March 15, 2006
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