Backtesting short-term treasury management strategies based on multi-stage stochastic programming

We show the practical viability of a short-term treasury management model which is formulated as a multi-stage stochastic linear program. A company minimises the Conditional Value at Risk of final wealth, subject to given future cash flows and the uncertain future development of interest rates and equity returns, choosing an asset allocation among cash, several bonds and an equity investment. The scenario generation procedure includes an estimation of the market price of risk and a change of the underlying probability measure. We provide an out-of-sample backtest for the proposed policy and compare the performance to alternative strategies. Our approach shows a better risk-return trade-off for different aggregated risk measures. Further, we perform several numerical studies based on a real market data set to test for the sensitivity to changes in the input parameters, for example shifts of the yield curve, changes in the equity spread or the cash flows. The resulting portfolios are well-diversified and the impact on the asset allocation follows economic intuition.