Strategic asset allocation with liabilities: Beyond stocks and bonds

Abstract

This paper studies the strategic asset allocation for an investor with risky liabilities which are subject to inflation and real interest rate risk and who invests in stocks, government bonds, corporate bonds, T-bills, listed real estate, commodities and hedge funds. Using a vector autoregression for returns, liabilities and macro-economic state variables the paper explores the intertemporal covariance structure of assets and liabilities. We find horizon effects in time diversification, risk diversification, inflation hedge and real interest rate qualities. The covariance structure gives insights into which asset classes have a term structure of risk that is different from that of stocks and bonds. The alternative assets classes add value for long-term investors. Differences in strategic portfolios for asset-only and asset-liability investors are due to differences in the global minimum variance and ARTICLE IN PRESS www.elsevier.com/locate/jedc 0165-1889/$ -see front matter r (R.P.M.M. Hoevenaars).liability hedge portfolio. We find that the benefits of long-term investing are larger when there are liabilities. r

Inflation-Hedging Portfolios in Different Regimes

“…In an ALM context, Hoevenaars et al (2008) and Amenc et al (2009) also find significant appeal in these asset classes, which are interesting sources of diversification and inflation hedging in a portfolio. To the best of our knowledge, however, these asset classes have not yet been studied in an asset-only context with an inflation target.…”

“…Continuing the pioneering work of Brennan et al (1997) and Campbell and Viceira (2002), many researchers have sought to show that long-term allocation is very different from short-term allocation when returns are partially predictable (Barberis (2000), Brennan and Xia (2002), Campbell et al (2003), Guidolin and Timmermann (2005), Fugazza et al (2007)). The approach developed in an assets-only framework was extended to asset and liability management (ALM) using traditional classes (van Binsbergen and Brandt (2007)) but also alternative assets (Goetzmann and Valaitis (2006), Hoevenaars et al (2008), Amenc et al (2009)). One common characteristic of these studies is their focus on the situation of investors, such as pension funds, with liabilities which are subject to the risk of both fluctuating inflation and real interest rates.…”

“…The studies of inflation hedging properties in an ALM framework with a liability constraint generally focus on a "surplus optimisation" (Leibowitz (1987), Sharpe and Tint (1990), Hoevenaars et al (2008)). In our context, however, this risk measure is not the one that corresponds best to investors' objectives.…”

The performance measurement of listed companies of the agribusiness sector on the stock exchange of Thailand

“…Liabilities are used as a financial tool for controlling both the inside and outside operations, and the expansion of the business. In addition, liabilities can be used to measure the performance of a business by identifying the period of time for paying debts which includes debts payable within one year or longer than in one year (Hoevenaars et al 2008;Liu 2011). Shareholders' equity consists of two main sources.…”

Flexible Indeterminate Factor-Based Asset Allocation

“…This is similar in many other cases, such as rates, inflation, and currency, but perhaps less so in liquidity and volatility. Risk estimates are similarly available to a greater or lesser degree, and may even be supplemented by accessing and implementing the academic literature on risk modeling and portfolio choice (Campbell and Viceira [2005], Hoevenaars et al [2008], Van den Goorbergh et al [2011]). …”