Dynamic Asset Allocation with Liabilities
European Financial Management, Forthcoming
67 Pages Posted: 3 May 2012 Last revised: 22 Nov 2016
Date Written: March 2016
Abstract
We develop an analytical solution to the dynamic multi-period portfolio choice problem of an investor with risky liabilities and time varying investment opportunities. We use the model to compare the asset allocation of investors who take liabilities into account, assuming time varying returns and a multi-period setting with the asset allocation of myopic ALM investors. In the absence of regulatory constraints on asset allocation weights, there are significant gains to investors who have access to a dynamic asset allocation model with liabilities. The gains are smaller under the typical funding ratio constraints faced by pension funds.
Keywords: Strategic Asset Allocation, Dynamic Asset Allocation, Asset–Liability Management
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation
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