Rebalancing Strategies for Long-Term Investors

Leading pension plans use asset and liability management systems to optimizise their strategic decisions.


John M. Mulvey

Department of Operations Research and Financial EngineeringBendheim Center for Finance, Princeton University

Koray D. Simsek

Associate Professor of Finance, EDHEC Business SchoolResearch Associate, EDHEC-Risk Institute

The multi-stage models link asset allocation decisions with payments to beneficiaries, changes to plan policies and related issues, to maximize the plan's surplus within a given risk tolerance. Temporal aspects complicate the problem but give rise to special opportunities for dynamic investment strategies. Within these models, the portfolio must be re-revised in the face of transaction and market impact costs. The rebalancing problem is posed as a generalized network with side conditions. We develop a specialized algorithm for solving the resulting problem. A real-world pension example illustrates the concepts.

Type: Working paper
Date: le 11/04/2007
Research Cluster : Finance

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