Asset and liability (AL) management under the mean–variance criteria refers to an optimization problem that maximizes the expected final surplus subject to a given variance of the final surplus or, equivalently, minimizes the variance of the final surplus subject to a given expected final surplus. We employ stochastic optimal control theory to analytically solve the AL management problem in a continuous-time setting. More specifically, we derive both the optimal policy and the mean–variance efficient frontier by a stochastic linear quadratic control framework. Then, the quality of the derived optimal AL management policy is examined by comparing it with those in the literature. We further discuss consequences of a discrepancy in objectives between equity holders and investors of a mutual fund. Finally, the optimal funding ratio, i.e., the wealth-to-liability ratio, is determined. Copyright © 2006 Elsevier Ltd. All rights reserved.
CitationChiu, M. C., & Li, D. (2006). Asset and liability management under a continuous-time mean-variance optimization framework. Insurance: Mathematics and Economics, 39(3), 330-355. doi: 10.1016/j.insmatheco.2006.03.006
- Asset–liability management
- Portfolio selection
- Efficient frontier
- Linear-quadratic control