Dynamic Asset Liability Management Under Model Uncertainty

35 Pages Posted: 19 Jan 2018 Last revised: 23 Jan 2018

See all articles by Ferenc Horvath

Ferenc Horvath

City University of Hong Kong (CityU)

Frank De Jong

Tilburg University - Department of Finance

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: January 13, 2018

Abstract

We analyze a dynamic Asset Liability Management problem with model uncertainty in a complete market. The fund manager acts in the best interest of the pension holders by maximizing the expected utility derived from the terminal funding ratio. We solve the robust multi-period Asset Liability Management problem in closed form, and identify two constituents of the optimal portfolio: the myopic demand, and the liability hedge demand. We find that even though the investment opportunity set is stochastic, the investor does not have intertemporal hedging demand. We also find that model uncertainty induces a more conservative investment policy regardless of the risk attitude of the fund manager, i.e., a robust investment strategy corresponds to risk exposures which provide a much stronger liability hedge.

Keywords: asset liability management, liability-driven investment, robustness, uncertainty, ambiguity

JEL Classification: C61, G11, G12

Suggested Citation

Horvath, Ferenc and De Jong, Frank and Werker, Bas J.M., Dynamic Asset Liability Management Under Model Uncertainty (January 13, 2018). Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=3101345 or http://dx.doi.org/10.2139/ssrn.3101345

Ferenc Horvath (Contact Author)

City University of Hong Kong (CityU) ( email )

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HOME PAGE: http://www.ferenchorvath.com

Frank De Jong

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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