Skip to main content
SpringerLink
Log in

Linking strategic and tactical planning systemsfor asset and liability management

  • Published:
Annals of Operations Research Aims and scope Submit manuscript

Abstract

Total enterprise risk management involves a systematic approach for evaluating/controlling risks within a large firm such as a property‐casualty insurance company. Thebasic idea is to coordinate planning throughout the organization, from traders and underwritersto the CFO, in order to maximize the company's economic surplus at the desiredlevel of enterprise risk. At present, it is difficult to link strategic systems, such as assetallocation, to tactical systems for pricing securities and selecting new products. We proposetwo solutions. First, we develop a “price of risk” for significant decisions possessingcorrelatedfactors. Second, we create a set of dynamic investment categories, called hybrid assets,for use in an asset and liability management framework. We illustrate the concepts via aninsurance planning problem, whereby the goal is to optimize the company's surplus.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. D. Bell, Risk, return, and utility, Management Science 41(1995)1.

    Google Scholar 

  2. A.J. Berger and J.M. Mulvey, Integrative risk management for individual investors, in: World Wide Asset and Liability Modeling, eds. W.T. Ziemba and J.M. Mulvey, Cambridge University Press, 1998.

  3. G.C.E. Boender, A hybrid simulation/optimization scenario model for asset/liability management, Report 9513/A, Erasmus University, Rotterdam, 1995.

    Google Scholar 

  4. J. Campbell, A. Lo and A.C. MacKinlay, The Econometrics of Financial Markets, Princeton University Press, 1997.

  5. D.R. Cariño, T. Kent, D.H. Myers, C. Stacey, M. Sylvanus, A. Turner, K. Watanabe and W.T. Ziemba, The Russell-Yasuda Kasai model: An asset liability model for a Japanese insurance company using multi-stage stochastic programming, Interfaces 24(1994)29–49.

    Google Scholar 

  6. D.R. Carino and W.T. Ziemba, Formulation of the Russell-Yasuda Kasai financial planning model, Operations Research (1998).

  7. K.A. Froot and J.C. Stein, Risk management, capital budgeting, and capital structure policy for financial institutions: An integrated approach, Journal of Financial Economics 47(1998)55–82.

    Google Scholar 

  8. P. Huber, A review of Wilkie's stochastic model, Actuarial Research Paper No. 70, The City University, London, 1995.

    Google Scholar 

  9. J. Hull, Options, Futures, and Other Derivatives, Prentice-Hall, 1997.

  10. P. Jorion, Value at Risk, McGraw-Hill, 1997.

  11. J.M. Mulvey, S. Correnti and J. Lummis, Total integrated risk management: Insurance elements, Princeton University Report SOR–97–2, 1997.

  12. J.M. Mulvey and A. Ruszczyński, A new scenario decomposition method for large-scale stochastic optimization, Operations Research 43(1995)447–490.

    Google Scholar 

  13. J.M. Mulvey, R. Rush, J. Mitchell and T. Willemain, Stratified filtered sampling in stochastic optimization, Princeton University Report SOR–97–7, 1997.

  14. J.M. Mulvey, D. Rosenbaum and B. Shetty, Parameter estimation in stochastic scenario generation systems, Princeton University Report SOR–96–15, to appear in European Journal of Operations Research.

  15. J.M. Mulvey, Generating scenarios for the Towers Perrin investment system, Interfaces 26(1996) 1–15.

    Google Scholar 

  16. J.M. Mulvey, It always pays to look ahead, Balance Sheet 4,No. 4 (1995/96).

  17. J.M. Mulvey and A. Thorlacius, The Towers Perrin global capital market scenario generation system: CAP:Link, in: World Wide Asset and Liability Modeling, eds. W.T. Ziemba and J.M. Mulvey, Cambridge University Press, 1998.

  18. J.M. Mulvey and W.T. Ziemba, Asset and liability allocation in a global environment, in: Finance, eds. R. Jarrow et al., in: Handbooks in Operations Research and Management Science, Vol. 9, North-Holland, 1995, pp. 435–463.

  19. S. Natenberg, Option Volatility and Pricing, Richard Irwin, 1994.

  20. A.F. Perold and W.F. Sharpe, Dynamic strategies for asset allocation, Financial Analysis Journal (Jan. 1988)16–27.

  21. M.W. Peskin, Asset allocation and funding policy for corporate-sponsored defined-benefit pension plans, The Journal of Portfolio Management (Winter 1997)66–73.

  22. A.D. Wilkie, Stochastic investment models: Theory and applications, Insurance: Mathematics and Economics 6(1987)65–83.

    Google Scholar 

  23. A.D. Wilkie, More on a stochastic asset model for actuarial use, Institute of Actuaries and Faculty of Actuaries, 1995.

  24. W. Ziemba and J. Mulvey (eds.), World Wide Asset and Liability Management, Cambridge University Press, 1998.

Download references

Authors
  1. John M. Mulvey
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Chris Madsen
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. François Morin
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Mulvey, J.M., Madsen, C. & Morin, F. Linking strategic and tactical planning systemsfor asset and liability management. Annals of Operations Research 85, 249–266 (1999). https://doi.org/10.1023/A:1018925912190

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1018925912190

Keywords

Search

Navigation