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A Random Parameter Model for Continuous-Time Mean-Variance Asset-Liability Management

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  • Hui-qiang Ma
  • Meng Wu
  • Nan-jing Huang

Abstract

We consider a continuous-time mean-variance asset-liability management problem in a market with random market parameters; that is, interest rate, appreciation rates, and volatility rates are considered to be stochastic processes. By using the theories of stochastic linear-quadratic (LQ) optimal control and backward stochastic differential equations (BSDEs), we tackle this problem and derive optimal investment strategies as well as the mean-variance efficient frontier analytically in terms of the solution of BSDEs. We find that the efficient frontier is still a parabola in a market with random parameters. Comparing with the existing results, we also find that the liability does not affect the feasibility of the mean-variance portfolio selection problem. However, in an incomplete market with random parameters, the liability can not be fully hedged.

Suggested Citation

  • Hui-qiang Ma & Meng Wu & Nan-jing Huang, 2015. "A Random Parameter Model for Continuous-Time Mean-Variance Asset-Liability Management," Mathematical Problems in Engineering, Hindawi, vol. 2015, pages 1-16, October.
    • Handle: RePEc:hin:jnlmpe:687428
    DOI: 10.1155/2015/687428
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