Coming Up Short: Managing Underfunded Portfolios in a LDI-ES Framework

23 Pages Posted: 20 Feb 2014  

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Seoyoung Kim

Santa Clara University

Meir Statman

Santa Clara University - Department of Finance

Date Written: January 31, 2014

Abstract

We employ a liability directed investment (LDI) rebalancing framework based on expected shortfall (ES), which we refer to as LDI-ES, to prescribe remedies for an underfunded portfolio. Investors in the LDI-ES framework face a risky asset, such as a stock index, and a risk-free bond. They begin with some level of current wealth and set their target wealth at the end of N periods, and their tolerance for shortfalls from that target wealth. Portfolio rebalancing in the LDI-ES framework is contrasted with common fixed-proportions rebalancing, where portfolio allocations are rebalanced to ratios, such as 60:40, at the beginning of each of N periods. We consider critical issues of underfunding, where there is no portfolio that can meet the shortfall constraint, and we explore the effectiveness of (a) portfolio infusions in resolving underfunded situations, relative to other measures such as (b) increasing risk, (c) cutting back on target liabilities/goals, and (d) extending portfolio horizon.

Keywords: Liability directed investing; behavioral portfolio theory; expected shortfall; re-balancing; infusions

JEL Classification: G02; G11; G23

Suggested Citation

Das, Sanjiv Ranjan and Kim, Seoyoung and Statman, Meir, Coming Up Short: Managing Underfunded Portfolios in a LDI-ES Framework (January 31, 2014). Available at SSRN: https://ssrn.com/abstract=2398266 or http://dx.doi.org/10.2139/ssrn.2398266

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Seoyoung Kim (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Meir Statman

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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