Erik Bogentoft, H. Edwin Romeijn, Stanislav Uryasev
Asset/Liability Management for pension funds using CVaR constraints
This paper studies formal optimal decision approaches for a
multi-period Asset/Liability Management model for a pension fund.
As a risk measure we use Conditional Value-at-Risk (CVaR), which
is the weighted average of the Value-at-Risk (VaR) and the losses
exceeding VaR. The model is based on sample-path simulation of the
fund liabilities and returns of financial instruments included in
the portfolio. The same optimal decisions are made for groups of
sample-paths which exhibit similar performance characteristics.
Since allocation proportions depend on time, these techniques are
more flexible than more standard allocation procedures such as
"constant proportions." Optimization is conducted using linear
programming. However, compared to traditional stochastic
programming algorithms for which the problem dimension increases
exponentially in the number of time stages, our approach exhibits
a linear growth of the dimension. Therefore, this approach allows
for the solution of problems with very large numbers of
instruments and scenarios.