51 research outputs found
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Dynamic asset (and liability) management under market and credit risk
We introduce a modelling paradigm which integrates credit risk and market
risk in describing the random dynamical behaviour of the underlying fixed income assets.
We then consider an asset and liability management (ALM) problem and develop a mul-
tistage stochastic programming model which focuses on optimum risk decisions. These
models exploit the dynamical multiperiod structure of credit risk and provide insight
into the corrective recourse decisions whereby issues such as the timing risk of default is
appropriately taken into consideration. We also present a index tracking model in which
risk is measured (and optimised) by the CVaR of the tracking portfolio in relation to the
index. Both in- and out-of-sample (backtesting) experiments are undertaken to validate
our approach. In this way we are able to demonstrate the feasibility and flexibility of
the chosen framework
www.Personal_Asset_Allocation.
Today consumers demand delivery of financial services anytime and anywhere, and their needs and desires
are evolving rapidly. The World Wide Web provides a rich channel for distributing customized services to a
range of clients. An Internet-based system developed by Prometeia S.r.l. for Italian banks—both traditional
and e-banks—supports consumers and financial advisors in planning personal finances. The system provides
advice on allocating personal assets to fund consumers’ needs, such as paying for a house, children’s education,
retirement, or other projects. State-of-the-art models of financial engineering—based on scenario optimization—
develop plans that are consistent with clients’ goals, their attitudes towards risk, and the prevailing views on
market performance. The system then helps clients to select off-the-shelf financial products, such as mutual
funds, to create customized portfolios. Finally, it analyzes the risk of portfolios in terms that are intuitive for
laypersons and monitors their performance in achieving the target goals. Four major banks use the system to
support their networks of several thousand financial advisors and to reach tens of thousands of clients directly
Scenario Optimization Asset and Liability Modelling for Individual Investors
We develop a scenario optimization model for asset and liability management of
individual investors. The individual has a given level of initial wealth and a target goal to be
reached within some time horizon. The individual must determine an asset allocation strategy
so that the portfolio growth rate will be sufficient to reach the target. A scenario optimization
model is formulated which maximizes the upside potential of the portfolio, with limits on
the downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochastic
behavior of asset returns is captured through bootstrap simulation, and the simulation is
embedded in the model to determine the optimal portfolio. Post-optimality analysis using
out-of-sample scenarios measures the probability of success of a given portfolio. It also
allows us to estimate the required increase in the initial endowment so that the probability of
success is improved
Asset and Liability Management for Insurance Products with Minimum Guarantees: The UK Case
Modern insurance products are becoming increasingly complex, offering various guarantees,
surrender options and bonus provisions. A case in point are the with-profits insurance
policies offered by UK insurers. While these policies have been offered in some form for centuries,
in recent years their structure and management have become substantially more
involved. The products are particularly complicated due to the wide discretion they afford
insurers in determining the bonuses policyholders receive. In this paper, we study the problem
of an insurance firm attempting to structure the portfolio underlying its with-profits fund. The
resulting optimization problem, a non-linear program with stochastic variables, is presented in
detail. Numerical results show how the model can be used to analyse the alternatives available
to the insurer, such as different bonus policies and reserving methods
Practical Financial Optimization: A Library of GAMS Models
In Practical Financial Optimization: A Library of GAMS Models, the authors provide
a diverse set of models for portfolio optimization, based on the General Algebraic
Modelling System. 'GAMS' consists of a language which allows a high-level, algebraic
representation of mathematical models and a set of solvers --- numerical algorithms ---
to solve them. The system was developed in response to the need for powerful and
flexible front-end tools to manage large, real-life models.
The work begins with an overview of the structure of the GAMS language, and
discusses issues relating to the management of data in GAMS models. The authors
provide models for mean-variance portfolio optimization which address the
question of trading off the portfolio expected return against its risk. Fixed income
portfolio optimization models perform standard calculations and allow the user to
bootstrap a yield curve from bond prices. Dedication models allow for standard
portfolio dedication with borrowing and re-investment decisions, and are extended
to deal with maximisation of horizon return and to incorporate various practical
considerations on the portfolio tradeability. Immunization models provide for the
factor immunization of portfolios of treasury and corporate bonds.
The scenario-based portfolio optimization problem is addressed with mean absolute
deviation models, tracking models, regret models, conditional VaR models, expected
utility maximization models and put/call efficient frontier models. The authors
employ stochastic programming for dynamic portfolio optimization, developing
stochastic dedication models as stochastic extensions of the fixed income models
discussed in chapter 4. Two-stage and multi-stage stochastic programs extend the
scenario models analysed in Chapter 5 to allow dynamic rebalancing of portfolios as
time evolves and new information becomes known. Models for structuring index
funds and hedging interest rate risk on international portfolios are also provided.
The final chapter provides a set of 'case studies': models for large-scale applications
of portfolio optimization, which can be used as the basis for the development of
business support systems to suit any special requirements, including models for the
management of participating insurance policies and personal asset allocation.
The title will be a valuable guide for quantitative developers and analysts, portfolio
and asset managers, investment strategists and advanced students of financ
Auditing Public Debt Using Risk Management
The Audit Office of the Republic of Cyprus conducted the first-ever audit of the country's public debt, seeking answers to two key questions. Is government debt sustainable, and is debt financing efficient and effective in securing the lowest cost with acceptable risks? The audit's findings were discussed by the parliament and can have significant ramifications for public finance. However, public debt management is quite complex, and the International Organization of Supreme Audit Institutions suggests that sufficient technical knowledge is essential in undertaking an audit, including an understanding of the uncertain macroeconomy, financing conditions, and government fiscal stance. We use a risk management model based on scenario trees in conducting the audit. The model determines optimal debt financing strategies to benchmark the performance of the country's Public Debt Management Office and answer the audit questions. We also incorporate an integrated assessment model to examine the risks from climate change. The auditor general presented the findings to the Parliamentary Audit Committee in the presence of the Minister of Finance, and his recommendations are expected to have a significant impact on the debt operations of the country
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