Rebalancing Strategies for Long-Term Investors

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

Author(s):

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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