Managing Pension Assets: from Surplus Optimization to Liability-Driven Investment

In this paper, we consider an intertemporal portfolio problem in the presence of liability constraints.

Author(s):

Lionel Martellini

Professor of Finance, EDHEC Business SchoolScientific Director, EDHEC Risk and Asset Management Research Centre

Using the value of the liability portfolio as a natural numeraire, we find that the solution to this problem involves a three-fund separation theorem that provides formal justification to some recent so-called liability-driven investment solutions offered by several investment banks and asset management firms, which are based on investment in two underlying building blocks (in addition to the risk-free asset), the standard optimal growth portfolio and a liability hedging portfolio.

Type: Working paper
Date: le 06/03/2006
Research Cluster : Finance

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