Mean-variance equilibrium asset-liability management strategy with cointegrated assets

Authors

Keywords:

asset-liability management, cointegration, mean–variance, time inconsistency

Abstract

This paper investigates asset-liability management problems in a continuous-time economy. When the financial market consists of cointegrated risky assets, institutional investors attempt to make profit from the cointegration feature on the one hand, while on the other hand they need to maintain a stable surplus level, that is, the company’s wealth less its liability. Challenges occur when the liability is random and cannot be fully financed or hedged through the financial market. For mean–variance investors, an additional concern is the rational time-consistency issue, which ensures that a decision made in the future will not be restricted by the current surplus level. By putting all these factors together, this paper derives a closed-form feedback equilibrium control for time-consistent mean–variance asset-liability management problems with cointegrated risky assets. The solution is built upon the Hamilton–Jacobi–Bellman framework addressing time inconsistency.

doi: 10.1017/S1446181120000164

Author Biography

Mei Choi Chiu, Education University of Hong Kong

Associate Professor,

 Department of Mathematics and Information Technology,

Education University of Hong Kong.

Published

2021-01-13

Issue

Section

Articles for Printed Issues