Asset-Liability Management Under Time-Varying Investment Opportunities

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Executive Summary

In this paper, the authors propose multi-stage stochastic linear programming for asset-liability management under time-varying investment opportunities. They use a first-order unrestricted vector autoregressive process to model predictability in the asset returns and the state variables, where - additional to equity returns and dividend-price ratios - Nelson/Siegel parameters are included to account for the evolution of the yield curve. As objective function they minimize conditional value at risk of the shareholder value, i.e. the difference between the mark-to-market value of (financial) assets and the present value of future liabilities. The results indicate strong hedging demands to mitigate interest rate risks.