Research and publications

Measuring The Benefits Of Dynamic Asset Allocation Strategies In The Presence Of Liability Constraints

The recent pension crisis has triggered a fierce debate in most developed countries between advocates of a tighter regulation designed to provide explicit incentives for pension funds to increase t ...

Author(s) :

Lionel Martellini, Vincent Milhau

Summary :

The recent pension crisis has triggered a fierce debate in most developed countries between advocates of a tighter regulation designed to provide explicit incentives for pension funds to increase their focus on risk management, and those arguing that imposing short-term funding constraints and solvency requirements on such long-term investors would only increase the cost of pension financing. We analyse this question in the context of a formal continuous-time dynamic asset allocation model for an investor facing liability commitments subject to inflation and interest rate risks. In an empirical exercise, we find that the presence of short-term funding ratio constraints indeed involves a positive welfare cost, but that cost is not found to be prohibitive for reasonable parameter values.

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Type : EDHEC Publication
Date : 24/04/2009
Keywords :

Asset-Liability Management