Developing a two-stage multi-period stochastic model for asset and liability management: A real case study in a commercial bank of Iran

Abstract

In this paper, a novel two-stage multi-period stochastic model is developed to obtain a comprehensive plan. This plan aims to manage the assets and liabilities such that all legal and budget constraints are satisfied. Assets in the model include short- and long-term loans with reasonable interest rates, investments in the stock market, varied bonds with different expirations, investments in other banks, and the legal budget in the Central Bank. However, liabilities encompass all types of sight and investment deposits with different maturities. In the model, each type of deposit's amount is considered a decision variable, while its total amount is assumed to be stochastic. The mathematical model is constructed in an innovative way such that all previous loans and bonds with possible transactions in the planning horizon could be considered initial parameters. Real data for a commercial bank in Tehran, the Islamic Republic of Iran capital, are used to construct and check the optimization model. The total revenues obtained through the mathematical model and one achieved based on the experiences of financial experts in the commercial bank for four years are compared.