Abstract

https://ssrn.com/abstract=2201505
 
 

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Liability Driven Investment with Downside Risk


Andrew Ang


BlackRock, Inc

Bingxu Chen


Columbia Business School - Finance and Economics

Suresh M. Sundaresan


Columbia Business School - Finance and Economics

October 16, 2012

Netspar Discussion Paper No. 10/2012-051

Abstract:     
We develop a liability driven investment framework that incorporates downside risk penalties for not meeting liabilities. The shortfall between the asset and liabilities can be valued as an option which swaps the value of the endogenously determined optimal portfolio for the value of the liabilities. The optimal portfolio selection exhibits endogenous risk aversion and as the funding ratio deviates from the fully funded case in both directions, effective risk aversion decreases. When funding is low, the manager 'swings for the fences' to take on risk, betting on the chance that liabilities can be covered. Over-funded plans also can afford to take on more risk as liabilities are already well covered and so invest aggressively in risky securities.

Number of Pages in PDF File: 29

JEL Classification: -


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Date posted: January 17, 2013  

Suggested Citation

Ang, Andrew and Chen, Bingxu and Sundaresan, Suresh M., Liability Driven Investment with Downside Risk (October 16, 2012). Netspar Discussion Paper No. 10/2012-051. Available at SSRN: https://ssrn.com/abstract=2201505 or http://dx.doi.org/10.2139/ssrn.2201505

Contact Information

Andrew Ang (Contact Author)
BlackRock, Inc ( email )
55 East 52nd Street
New York City, NY 10055
United States
Bingxu Chen
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Suresh M. Sundaresan
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)
HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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