Using the diffusion limit of the discrete-time error correction model of cointegration for risky assets and geometric Brownian motion for the value of liabilities, we solve the asset-liability management (ALM) problem using the theory of backward stochastic differential equations. The solutions of the ALM policy and the efficient frontier in terms of surplus are obtained as closed-form formulas. We numerically examine the impact of cointegration to the trade-off between risk and return in managing cointegrated risky assets and random liabilities. Copyright © 2012 Elsevier B.V. All rights reserved.
CitationChiu, M. C., & Wong, H. Y. (2013). Mean-variance principle of managing cointegrated risky assets and random liabilities. Operations Research Letters, 41(1), 98-106.
- Asset-liability management
- Mean-variance portfolio