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Optimal Asset Allocation in Asset Liability Management

Jules H. Van Binsbergen
Stanford University - Graduate School of Business

Michael W. Brandt
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)


September 2006

EFA 2007 Ljubljana Meetings Paper

Abstract:     
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.

Keywords: Dynamic portfolio choice, pension plans

JEL Classifications: G0, G11, G23, G28

Working Paper Series

Date posted: March 15, 2006 ; Last revised: March 08, 2007

Suggested Citation

Van Binsbergen, Jules H. and Brandt, Michael W., Optimal Asset Allocation in Asset Liability Management (September 2006). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=890891


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Contact Information

Jules H. Van Binsbergen (Contact Author)
Stanford University - Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States
6507211353 (Phone)
6507259932 (Fax)
HOME PAGE: http://www.stanford.edu/~jvb2/Binsbergen.htm

Michael W. Brandt
Duke University - Fuqua School of Business ( email )
1 Towerview Drive
Durham, NC 27708-0120
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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