Optimal Asset Allocation Subject to Liquidity and Withdrawal Risks

39 Pages Posted: 8 Jan 2021

See all articles by Areski Cousin

Areski Cousin

affiliation not provided to SSRN

Ying Jiao

Universit ́e Claude Bernard-Lyon 1, Institut de Science Financier et d’Assurances

Christian Robert

University of Claude Bernard Lyon 1 - Institute of Finance and Insurance Science (ISFA)

Olivier David Zerbib

CREST, ENSAE, Institut Polytechnique de Paris

Date Written: November 13, 2020

Abstract

This study investigates the optimal asset allocation of a financial institution subject to liquidity risks and whose customers are free to withdraw their capital-guaranteed financial contracts at any time. Accounting for constraints on the solvency of the institution, we present a general optimization problem and provide a dynamic programming principle for the optimal dynamic investment strategies. Furthermore, we consider an explicit context, including the interest rate and credit intensity fluctuations, and show, by numerical results, that the optimal strategy improves the solvency and the asset returns of the institution compared to the baseline asset allocation.

Keywords: Asset allocation, ALM, liquidity risk, withdrawal risk

JEL Classification: G11, G21, G22

Suggested Citation

Cousin, Areski and Jiao, Ying and Robert, Christian and Zerbib, Olivier David, Optimal Asset Allocation Subject to Liquidity and Withdrawal Risks (November 13, 2020). Available at SSRN: https://ssrn.com/abstract=3730057 or http://dx.doi.org/10.2139/ssrn.3730057

Areski Cousin

affiliation not provided to SSRN

Ying Jiao

Universit ́e Claude Bernard-Lyon 1, Institut de Science Financier et d’Assurances ( email )

Lyon
France

Christian Robert

University of Claude Bernard Lyon 1 - Institute of Finance and Insurance Science (ISFA) ( email )

50, Avenue Tony Garnier
Lyon Cedex 07, 69366
France

Olivier David Zerbib (Contact Author)

CREST, ENSAE, Institut Polytechnique de Paris ( email )

5 Avenue Le Chatelier
Palaiseau, Paris 91120
France

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