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Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

Author

Listed:
  • Areski Cousin
  • Ying Jiao

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, ISFA - Institut de Science Financière et d'Assurances)

  • Christian Yann Robert
  • Olivier David Zerbib

Abstract

This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. In accounting for the asset-liability mismatch risk of the institution, we present a general utility optimization problem in a discrete-time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate, and credit intensity fluctuations, and show by numerical results that the optimal strategy improves both the solvency and asset returns of the institution compared to a standard institutional investor's asset allocation.

Suggested Citation

  • Areski Cousin & Ying Jiao & Christian Yann Robert & Olivier David Zerbib, 2022. "Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints," Post-Print hal-04894071, HAL.
    • Handle: RePEc:hal:journl:hal-04894071
    DOI: 10.3390/risks10010015
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    References listed on IDEAS

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    1. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
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    3. Cousin, Areski & Jiao, Ying & Robert, Christian Y. & Zerbib, Olivier David, 2016. "Asset allocation strategies in the presence of liability constraints," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 327-338.
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    15. Ying Jiao & Olivier Klopfenstein & Peter Tankov, 2017. "Hedging under multiple risk constraints," Finance and Stochastics, Springer, vol. 21(2), pages 361-396, April.
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    Cited by:

    1. Benjamín Vallejo-Jiménez & Francisco Venegas-Martínez & Oscar V. De la Torre-Torres & José Álvarez-García, 2022. "Simulating Portfolio Decisions under Uncertainty When the Risky Asset and Short Rate Are Modulated by an Inhomogeneous and Asset-Dependent Markov Chain," Mathematics, MDPI, vol. 10(16), pages 1-14, August.

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