Optimal Asset Allocation in Asset Liability Management

38 Pages Posted: 15 Mar 2007 Last revised: 11 Dec 2022

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

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Date Written: March 2007

Abstract

We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.

Suggested Citation

van Binsbergen, Jules H. and Brandt, Michael W., Optimal Asset Allocation in Asset Liability Management (March 2007). NBER Working Paper No. w12970, Available at SSRN: https://ssrn.com/abstract=971604

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

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Philadelphia, PA 19104-6365
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National Bureau of Economic Research (NBER)

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HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

1 Towerview Drive
Durham, NC 27708-0120
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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