RT Journal Article
SR Electronic
T1 Liability-Driven Investment with Downside<br/>Risk
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 71
OP 87
DO 10.3905/jpm.2013.40.1.071
VO 40
IS 1
A1 Andrew Ang
A1 Bingxu Chen
A1 Suresh Sundaresan
YR 2013
UL https://pm-research.com/content/40/1/71.abstract
AB The authors develop a liability-driven investment framework that incorporates downside risk penalties for not meeting liabilities. The shortfall between the asset and liabilities can be valued as an option that swaps the value of the endogenously determined optimal portfolio for the value of the liabilities. The optimal portfolio selection exhibits endogenous risk aversion and, as the funding ratio deviates from the fully funded case in both directions, effective risk aversion decreases. When funding is low, the manager swings for the fences to take on risk, betting on the chance that liabilities can be covered. Over-funded plans also can afford to take on more risk, as liabilities are already well covered and so invest aggressively in risky securities.TOPICS: Portfolio construction, options, risk management