Abstract
This paper studies the optimal time consistent investment strategies in multiperiod asset-liability management problems under mean-variance criterion. By applying time consistent model of Chen et al. (2013) and employing dynamic programming technique, we derive two-time consistent policies for asset-liability management problems in a market with and without a riskless asset, respectively. We show that the presence of liability does affect the optimal strategy. More specifically, liability leads a parallel shift of optimal time-consistent investment policy. Moreover, for an arbitrarily risk averse investor (under the variance criterion) with liability, the time-diversification effects could be ignored in a market with a riskless asset; however, it should be considered in a market without any riskless asset.
Highlights
By using variance as a risk measure, Markowitz [1] proposed the classic mean-variance portfolio selection model, which has become the theoretical foundation of modern finance theory and has been extended in several directions
After comparing the optimal time-consistent policies with myopic strategies, we show that, for an arbitrarily risk averse investor, if there is a riskless asset in the market, the time-diversification effects arising from multiperiod optimization can be ignored, otherwise, the effects should be considered
After comparing the results of these two different markets, we find that, for an arbitrarily risk averse investor, if there is a riskless asset in the market, the time-diversification effects could be ignored, otherwise, the effects should be considered
Summary
By using variance as a risk measure, Markowitz [1] proposed the classic mean-variance portfolio selection model, which has become the theoretical foundation of modern finance theory and has been extended in several directions. In a single-period setting, liability leads a parallel shift of meanvariance optimal investment policy and affects the meanvariance efficient frontier Due to both theoretical interest and practical importance of asset-liability management, the research on mean-variance asset-liability management has attracted recent attentions. In order to make up this shortfall, Chen et al [16], by using a time consistent dynamic risk measure, proposed a separable dynamic mean-variance model and showed that the relevant optimal investment policy satisfies the Bellman’s optimality principle and the REQ. They employed Basak and Chabakauri’s [13] model to study the continuous-time asset-liability management problem They derived the time-consistent optimal strategy and showed that the time-consistent efficient frontier with liability is below that without liability.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
