Regime switching based portfolio selection for pension funds |
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Authors: | Karl Frauendorfer Ulrich Jacoby Alvin Schwendener |
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Institution: | University of St. Gallen, Switzerland Institute for Operations Research and Computational Finance (iorcf), Bodanstrasse 6, CH-9000 St. Gallen, Switzerland |
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Abstract: | This paper shows how a mean variance criterion can be applied to a multi period setting in order to obtain efficient portfolios in an asset and liability context. The optimization model allows for rebalancing activities, transaction costs, stochastic volatilities for both assets and liabilities. Furthermore, a general framework for the projection of pension fund liabilities as well as for the generation of asset returns is given. In a further step the dynamics of the liability maturity structure is modeled as customized index, whose volatility and correlation with asset returns become integral components of the applied regime switching approach. The numerical results illustrate the diversification of the assets and its risk return pattern in dependency of the liability dynamics. |
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Keywords: | G11 G15 G23 G32 C53 C61 |
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