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MEAN–VARIANCE EQUILIBRIUM ASSET-LIABILITY MANAGEMENT STRATEGY WITH COINTEGRATED ASSETS

Part of: Mathematical finance Mathematical economics

Published online by Cambridge University Press:  06 November 2020

MEI CHOI CHIU Open the ORCID record for MEI CHOI CHIU [Opens in a new window]
MEI CHOI CHIU*
Affiliation:
Department of Mathematics and Information Technology, The Education University of Hong Kong, 10 Lo Ping Road, Tai Po, New Territories, Hong Kong; e-mail: mcchiu@eduhk.hk.
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Abstract

This paper investigates asset-liability management problems in a continuous-time economy. When the financial market consists of cointegrated risky assets, institutional investors attempt to make profit from the cointegration feature on the one hand, while on the other hand they need to maintain a stable surplus level, that is, the company’s wealth less its liability. Challenges occur when the liability is random and cannot be fully financed or hedged through the financial market. For mean–variance investors, an additional concern is the rational time-consistency issue, which ensures that a decision made in the future will not be restricted by the current surplus level. By putting all these factors together, this paper derives a closed-form feedback equilibrium control for time-consistent mean–variance asset-liability management problems with cointegrated risky assets. The solution is built upon the Hamilton–Jacobi–Bellman framework addressing time inconsistency.

Keywords

asset-liability managementcointegrationmean–variancetime inconsistency

MSC classification

Primary: 91G10: Portfolio theory
Secondary: 91B70: Stochastic models
Type
Research Article
Information
The ANZIAM Journal , Volume 62 , Issue 2 , April 2020 , pp. 209 - 234
Copyright
© Australian Mathematical Society 2020

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