Robust Asset-Liability Management with CRRA Utility in Regime-Switching Market: A Continuous-time Model

26 Pages Posted: 7 Sep 2019

See all articles by Xiaowei Chen

Xiaowei Chen

Nankai University

Fuzhe Huang

Nankai University

Xiufang Li

Nankai University

Date Written: September 2, 2019

Abstract

This paper describes a robust continuous-time asset-liability management problem under Markov regime-switching. Firstly, we use the "homothetic robustness" methodology, which preserves the performance of robustness independent with wealth process, to protect the ALM model not only run well in exactly modified state variables, but also perform reasonably well if there are some forms of model misspecification. Secondly, we consider the asset-to-liability ratio instead of the difference between assets and liabilities, which ensures that we use relative values instead of absolute values for comparison, to modify the wealth process. Besides, we use the stochastic dynamic programming method to get some closed-form results and analyze the impacts of parameters on the investment strategy and value function, respectively, by numerical examples.

Keywords: Asset-liability Management; Regime-switching; robustness; CRRA Utility

JEL Classification: C61; G11

Suggested Citation

Chen, Xiaowei and Huang, Fuzhe and Li, Xiufang, Robust Asset-Liability Management with CRRA Utility in Regime-Switching Market: A Continuous-time Model (September 2, 2019). Available at SSRN: https://ssrn.com/abstract=3447087 or http://dx.doi.org/10.2139/ssrn.3447087

Xiaowei Chen

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Fuzhe Huang (Contact Author)

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Xiufang Li

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

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