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Dynamic asset (and liability) management under market and credit risk

By NJ Jobst, G Mitra and SA Zenios

Abstract

We introduce a modelling paradigm which integrates credit risk and market\ud risk in describing the random dynamical behaviour of the underlying fixed income assets.\ud We then consider an asset and liability management (ALM) problem and develop a mul-\ud tistage stochastic programming model which focuses on optimum risk decisions. These\ud models exploit the dynamical multiperiod structure of credit risk and provide insight\ud into the corrective recourse decisions whereby issues such as the timing risk of default is\ud appropriately taken into consideration. We also present a index tracking model in which\ud risk is measured (and optimised) by the CVaR of the tracking portfolio in relation to the\ud index. Both in- and out-of-sample (backtesting) experiments are undertaken to validate\ud our approach. In this way we are able to demonstrate the feasibility and flexibility of\ud the chosen framework

Topics: Credit risk, Default risk, Asset and liability management, Stochastic programming
Publisher: The Centre for the Analysis of Risk and Optimisation Modelling Applications (CARISMA), Brunel University
Year: 2003
OAI identifier: oai:bura.brunel.ac.uk:2438/749
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