Dynamic Asset Liability Management under Model Uncertainty

We analyze a dynamic Asset Liability Management problem with model uncertainty in a complete market. The fund manager acts in the best interest of the pension holders
by maximizing the expected utility derived from the terminal funding ratio. We solve the robust multi-period Asset Liability Management problem in closed form, and identify two constituents of the optimal portfolio: the myopic demand, and the liability hedge demand. We find that even though the investment opportunity set is stochastic, the investor does not have intertemporal hedging demand. We also find that model uncertainty induces a more conservative investment policy regardless of the risk attitude of the fund manager, i.e., a robust investment strategy corresponds to risk exposures which provide a much stronger liability hedge.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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