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Optimal portfolio choice under a liability constraint

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  • Leszek Zaremba
  • Włodzimierz Smoleński

Abstract

The problem of characterizing the least expensive bond portfolio that enables one to meet his/her liability to pay C dollars K years from now is dealt with in this article. Bond prices are allowed to be either overpriced or underpriced at the purchase time, while at the sale time the bonds are suppose to be fairly priced. Assuming shifts in spot rates to occur instantly after the acquisition of a bond portfolio Z and to follow fairly general type of behavior described by the condition (2), we give both necessary and sufficient conditions for Z to solve the immunization problem above. Our model is general enough to cover situations with twists in the yield curve. Making use of the K-T conditions, we explain in remark 7 why we focus on search of an optimal portfolio in the class of barbell strategies. Finally, by means of the K-T conditions we find an optimal bond portfolio which solves the immunization problem. Copyright Kluwer Academic Publishers 2000

Suggested Citation

  • Leszek Zaremba & Włodzimierz Smoleński, 2000. "Optimal portfolio choice under a liability constraint," Annals of Operations Research, Springer, vol. 97(1), pages 131-141, December.
    • Handle: RePEc:spr:annopr:v:97:y:2000:i:1:p:131-141:10.1023/a:1018996712442
    DOI: 10.1023/A:1018996712442
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    Cited by:

    1. Youtang Zhang & Eshetu Yesuf Ayele, 2022. "Factors Affecting Small and Micro Enterprise Performance with the Mediating Effect of Government Support: Evidence from the Amhara Region Ethiopia," Sustainability, MDPI, vol. 14(11), pages 1-20, June.
    2. Joseba Iñaki De La Peña & Iván Iturricastillo & Rafael Moreno & Francisco Román & Eduardo Trigo, 2021. "Towards an immunization perfect model?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1181-1196, January.
    3. Aji Winara & Eva Fauziyah & Suhartono & Ary Widiyanto & Sanudin & Aris Sudomo & Mohamad Siarudin & Aditya Hani & Yonky Indrajaya & Budiman Achmad & Dian Diniyati & Wuri Handayani & Endah Suhaendah & D, 2022. "Assessing the Productivity and Socioeconomic Feasibility of Cocoyam and Teak Agroforestry for Food Security," Sustainability, MDPI, vol. 14(19), pages 1-24, September.
    4. Saira Begum & Muhammad Ashfaq & Enjun Xia & Usama Awan, 2022. "Does green transformational leadership lead to green innovation? The role of green thinking and creative process engagement," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 580-597, January.
    5. Michał Boczek & Marek Kałuszka, 2018. "On the Fong-Vašíček type inequalities for the assets/ liabilities portfolio immunization problem," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 51, pages 209-228.
    6. Marek Kałuszka & Alina Kondratiuk-Janyska, 2004. "On Duration-Dispersion Strategies for Portfolio Immunization," FindEcon Chapters: Forecasting Financial Markets and Economic Decision-Making, in: Władysław Milo & Piotr Wdowiński (ed.), Acta Universitatis Lodziensis. Folia Oeconomica nr 177/2004 - Forecasting and Decision-Making in Financial Markets, edition 1, volume 127, chapter 12, pages 191-202, University of Lodz.

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