Optimal Asset Allocation in Asset Liability Management / Jules H. van Binsbergen, Michael W. Brandt.

Format:

Book

Author/Creator:

van Binsbergen, Jules H.

Contributor:

National Bureau of Economic Research.

Brandt, Michael W.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12970.

NBER working paper series no. w12970

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.

Notes:

Print version record

March 2007.