Research and publications

The Benefits Of Structured Products In Asset-Liability Management

This paper introduces a continuous-time dynamic asset allocation model for an investor facing liability constraints in the presence of inflation and interest rate risks. When funding ratio constrai ...

Author(s) :

Lionel Martellini, Vincent Milhau

Summary :

This paper introduces a continuous-time dynamic asset allocation model for an investor facing liability constraints in the presence of inflation and interest rate risks. When funding ratio constraints are explicitly accounted for, the optimal policies, for which we obtain analytical expressions, are shown to extend standard Option-Based Portfolio Insurance (OBPI) strategies to a relative risk context, with the liability-hedging portfolio replacing the risk-free asset. We also show that the introduction of maximum funding ratio targets would allow pension funds to decrease the cost of downside liability risk protection while giving up part of the upside potential beyond levels where marginal utility of wealth (relative to liabilities) is low or almost zero. A revisited version of this paper was published in the October 2012 issue of the Journal of Pension Economics and Finance. 

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Type : Working paper
Date : 08/12/2008
Keywords :

Asset Allocation and Derivative Instruments