Development of a new asset liability Management model with liquidity and inflation risks based on the Lower Partial Moment

Abstract

Inflation and liquidity risks are two significant risks with which pension fund managers must contend. This study develops a new multi-period Asset Liability Management model to address these challenges. The model objective function minimizes both risks simultaneously. The Lower Partial Moment measure is used to minimize investment portfolio risk and a CVaR constraint is employed to avoid loss. A hybrid ARIMA-GARCH model is developed to generate scenarios regarding a case study from Iran. To do so, four different investment cases out of seven stocks from the stock market, one bond, three foreign currencies (Dollar, Euro, and Yen) and gold are considered. Findings affirm model efficacy and the model suggests that a portfolio of all four assets is the best investment strategy.