Back Testing Short-term Treasury Management Strategies Based on Multi-Stage Stochastic Programming

Journal of Asset Management, 2010, 11, 94-112

22 Pages Posted: 4 Jan 2009 Last revised: 29 Dec 2018

See all articles by Robert Ferstl

Robert Ferstl

Oesterreichische Nationalbank (OeNB)

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: January 1, 2009

Abstract

We show the practical viability of a short-term treasury management model which is formulated as a multi-stage stochastic linear program. A company minimises the Conditional Value at Risk of final wealth, subject to given future cash flows and the uncertain future development of interest rates and equity returns, choosing an asset allocation among cash, several bonds, and an equity investment. The scenario generation procedure includes an estimation of the market price of risk and a change of the underlying probability measure. We provide an out-of-sample back test for the proposed policy and compare the performance to alternative strategies. Our approach shows a better risk-return trade-off for different aggregated risk measures. Further, we perform several numerical studies based on a real market data set to test for the sensitivity to changes in the input parameters, e.g. shifts of the yield curve, changes in the equity spread or the cash flows. The resulting portfolios are well-diversified and the impact on the asset allocation follows economic intuition.

Keywords: Dynamic stochastic optimisation, Treasury management, Market price of risk, Change of measure, Scenario generation

JEL Classification: C61, G11

Suggested Citation

Ferstl, Robert and Weissensteiner, Alex, Back Testing Short-term Treasury Management Strategies Based on Multi-Stage Stochastic Programming (January 1, 2009). Journal of Asset Management, 2010, 11, 94-112. Available at SSRN: https://ssrn.com/abstract=1322256 or http://dx.doi.org/10.2139/ssrn.1322256

Robert Ferstl (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Alex Weissensteiner

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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