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A Benchmarking Approach to Optimal Asset Allocation for Insurers and Pension Funds

Australian School of Business Research Paper No. 2009ACTL07

30 Pages Posted: 14 Aug 2009 Last revised: 6 Nov 2009

See all articles by Bernard Wong

Bernard Wong

UNSW Australia Business School, School of Risk & Actuarial Studies

Andrew Lim

National University of Singapore (NUS) - Department of Decision Sciences; National University of Singapore (NUS) - Department of Finance; National University of Singapore (NUS) - Institute for Operations Research and Analytics

Date Written: November 3, 2009

Abstract

We solve the optimal asset allocation problem for an insurer or pension fund by using a benchmarking approach. Under this approach the objective is an increasing function of the relative performance of the asset portfolio compared to a benchmark. The benchmark can be, for example, a function of an insurer's liability payments, or the (either contractual or target) payments of a pension fund. The benchmarking approach tolerates but progressively penalizes shortfalls, while at the same time progressively rewarding out-performance. Working in a general, possibly non-Markovian setting, a solution to the optimization problem is presented, providing insights as to the impact of benchmarking on the resulting optimal portfolio.

Keywords: Asset-Liability Management, Portfolio Optimization, Benchmarking

JEL Classification: C61, G11

Suggested Citation

Wong, Bernard and Lim, Andrew E. B., A Benchmarking Approach to Optimal Asset Allocation for Insurers and Pension Funds (November 3, 2009). Australian School of Business Research Paper No. 2009ACTL07, Available at SSRN: https://ssrn.com/abstract=1448376 or http://dx.doi.org/10.2139/ssrn.1448376

Bernard Wong (Contact Author)

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

Room 2058 South Wing 2nd Floor
Quadrangle building, Kensington Campus
Sydney, NSW 2052
Australia

Andrew E. B. Lim

National University of Singapore (NUS) - Department of Decision Sciences ( email )

NUS Business School
Mochtar Riady Building, 15 Kent Ridge
Singapore, 119245
Singapore

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

National University of Singapore (NUS) - Institute for Operations Research and Analytics ( email )

Singapore

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