Robustness for asset-liability management of pension funds

We survey the literature on robust dynamic asset allocation with an emphasis on the asset-liability management of pension funds. After demonstrating the difference between risk and uncertainty (Section 1), we introduce two levels of uncertainty: parameter uncertainty and model uncertainty (Section 2.1). We describe four of the most widely used approaches in robust dynamic asset allocation problems: the penalty approach, the constraint approach, the Bayesian approach and the approach of smooth recursive preferences (Sections 2.4-2.7). In Section 3 we demonstrate the importance of uncertainty for investors (including pension funds) from both a normative and a positive aspect, then we review the literature on robust asset management and on robust asset-liability management. Section 4 concludes.

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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