A Path Integral Approach to Asset-Liability Management
Physica A: Statistical Mechanics and its Applications, Vol. 363, No. 2, pp.404-416, 2006
Posted: 14 Mar 2009
Date Written: May 20, 2005
Abstract
Functional integrals constitute a powerful tool in the investigation of financial models. In the recent econophysics literature, this technique was successfully used for the pricing of a number of derivative securities. In the present contribution, we introduce this approach to the field of asset-liability management. We work with a representation of cash flows by means of a two-dimensional delta-function perturbation, in the case of a Brownian model and a geometric Brownian model. We derive closed-form solutions for a finite horizon ALM policy. The results are numerically and graphically illustrated.
Keywords: Functional integral; ALM; Delta-Function perturbation; Local time; Spectral method
JEL Classification: G21, G22
Suggested Citation: Suggested Citation