Optimal Asset Allocation in Asset Liability Management

Jules van Binsbergen and Michael W. Brandt

No 12970, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G0 G11 G23 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-cfn and nep-rmg
Note: AP
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Citations: View citations in EconPapers (10)

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