Article

Pricing Embedded Options In Value-Based Asset Liability Management

Roy P. M. M. Hoevenaars

in The Oxford Handbook of Quantitative Asset Management

Published in print December 2011 | ISBN: 9780199553433
Published online November 2012 | | DOI: http://dx.doi.org/10.1093/oxfordhb/9780199553433.013.0020

Series: Oxford Handbooks in Finance

 Pricing Embedded Options In Value-Based Asset Liability Management

More Like This

Show all results sharing these subjects:

  • Economics
  • Financial Markets
  • Econometric and Statistical Methods and Methodology: General

GO

Show Summary Details

Preview

The classical asset liability management (ALM) approach has a significant role in financial policy decisions of many institutional investors and consultancy firms. Classic ALM analysis focuses on financial position and balance sheet and is based on the probability distributions of key pension fund variables over a certain horizon. Econometric models are used to create projections of economic scenarios. Economic value can be understood as the present financial value of uncertain future cash flows such as it relates to the value of future indexation flows and contributions. The absolute and relative changes of the economic values of the future commitments in the pension deal from a change in the policy parameters reveals the changes in risk positions of the different groups of stakeholders. The return dynamics is based on a vector autoregressive (VAR) model that enables to distinguish long-term and short-term risk properties of asset classes. The ALM framework is based on a simulation study which projects the development of the pension fund in many future scenarios. The policy horizon for the classic ALM analysis is twenty years. The asset returns are used to determine the returns on the asset mix. Interest rates are used to compute the present value of liabilities, and inflation scenarios are employed to index the liabilities.

Keywords: asset liability management; vector autoregressive model; asset mix; present financial value; economic value; future cash flows

Article.  8816 words. 

Subjects: Economics ; Financial Markets ; Econometric and Statistical Methods and Methodology: General

Full text: subscription required

How to subscribe Recommend to my Librarian

Buy this work at Oxford University Press »

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.