A Path Integral Approach to Asset-Liability Management

Physica A: Statistical Mechanics and its Applications, Vol. 363, No. 2, pp.404-416, 2006

Posted: 14 Mar 2009

See all articles by Marc Decamps

Marc Decamps

Katholieke Universiteit Leuven (KUL)

Ann De Schepper

University of Antwerp - Faculty of Applied Economics

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Date Written: May 20, 2005

Abstract

Functional integrals constitute a powerful tool in the investigation of financial models. In the recent econophysics literature, this technique was successfully used for the pricing of a number of derivative securities. In the present contribution, we introduce this approach to the field of asset-liability management. We work with a representation of cash flows by means of a two-dimensional delta-function perturbation, in the case of a Brownian model and a geometric Brownian model. We derive closed-form solutions for a finite horizon ALM policy. The results are numerically and graphically illustrated.

Keywords: Functional integral; ALM; Delta-Function perturbation; Local time; Spectral method

JEL Classification: G21, G22

Suggested Citation

Decamps, Marc and De Schepper, Ann and Goovaerts, Marc, A Path Integral Approach to Asset-Liability Management (May 20, 2005). Physica A: Statistical Mechanics and its Applications, Vol. 363, No. 2, pp.404-416, 2006, Available at SSRN: https://ssrn.com/abstract=1358677

Marc Decamps (Contact Author)

Katholieke Universiteit Leuven (KUL) ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Ann De Schepper

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics ( email )

Leuven, B-3000
Belgium
+32 0 16 32 7446 (Phone)
+32 0 16 32 3740 (Fax)

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