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Dynamic Asset Allocation with Liabilities
Author(s) -
Giamouridis Daniel,
Sakkas Athanasios,
Tessaromatis Nikolaos
Publication year - 2017
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12097
Subject(s) - asset allocation , portfolio , asset (computer security) , pension , alternative asset , portfolio allocation , investment (military) , business , economics , finance , actuarial science , computer science , computer security , politics , political science , law
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.