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Mean-variance asset-liability management with inside information

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  • Xingchun Peng
  • Fenge Chen

Abstract

This paper studies an asset-liability management (ALM) problem under mean-variance criterion with inside information. The asset-liability manager is allowed to invest in a financial market composed of a bond and a stock. The stock price process is governed by a diffusion process with random parameters. The uncontrolled liability process is described by a general diffusion process with hedgeable risks and unhedgeable risks. We model the inside information by a general random variable related to the future values of financial assets and liabilities. By using the Donsker Delta functional technique and the BSDE method, we derive the analytic expressions of efficient strategy and efficient frontier. To illustrate the general result, an example is provided in which the efficient strategy and efficient frontier are obtained in closed form. The comparison of efficient frontiers with and without inside information demonstrates that taking advantage of inside information can improve the efficient frontier.

Suggested Citation

  • Xingchun Peng & Fenge Chen, 2022. "Mean-variance asset-liability management with inside information," Communications in Statistics - Theory and Methods, Taylor & Francis Journals, vol. 51(7), pages 2281-2302, April.
    • Handle: RePEc:taf:lstaxx:v:51:y:2022:i:7:p:2281-2302
    DOI: 10.1080/03610926.2020.1772982
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    Cited by:

    1. Rui Jiao & Wei Liu & Yijun Hu, 2023. "The Optimal Consumption, Investment and Life Insurance for Wage Earners under Inside Information and Inflation," Mathematics, MDPI, vol. 11(15), pages 1-18, August.

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