Use this URL to cite or link to this record in EThOS: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.764922
Title: Modelling the risk of underfunding in ALM models
Author: Alwohaibi, Maram
ISNI:       0000 0004 7658 3978
Awarding Body: Brunel University London
Current Institution: Brunel University
Date of Award: 2017
Availability of Full Text:
Access from EThOS:
Access from Institution:
Abstract:
Asset and Liability Management (ALM) models have become well established decision tools for pension funds. ALMs are commonly modelled as multi-stage, in which a large terminal wealth is required, while at intermediate time periods, constraints on the funding ratio, that is, the ratio of assets to liabilities, are imposed. Underfunding occurs when the funding ratio is too low; a target value for funding ratios is pre-specified by the decision maker. The risk of underfunding has been usually modelled by employing established risk measures; this controls one single aspect of the funding ratio distributions. For example, controlling the expected shortfall below the target has limited power in controlling shortfall under worst-case scenarios. We propose ALM models in which the risk of underfunding is modelled based on the concept of Second Order Stochastic Dominance (SSD). This is a criterion of ranking random variables - in our case funding ratios - that takes the entire distributions of interest into account and works under the widely accepted assumptions of decision makers being rational and risk averse. In the proposed SSD models, investment decisions are taken such that the resulting short-term distribution of the funding ratio is non-dominated with respect to SSD, while a constraint is imposed on the expected terminal wealth. This is done by considering progressively larger tails of the funding ratio distribution and considering target levels for them; a target distribution is thus implied. Different target distributions lead to different SSD efficient solutions. Improved distributions of funding ratios may be thus achieved, compared to the existing risk models for ALM. This is the first contribution of this thesis. Interesting results are obtained in the special case when the target distribution is deterministic, specified by one single outcome. In this case, we can obtain equivalent risk minimisation models, with risk defined as expected shortfall or as worst case loss. This represents the second contribution. The third contribution is a framework for scenario generation based on the "Birth, Immigration, Death, Emigration" (BIDE) population model and the Empirical copula; the scenarios are used to evaluate the proposed models and their special cases both in-sample and out-of-sample. As an application, we consider the planning problem of a large DB pension fund in Saudi Arabia.
Supervisor: Roman, D. ; Date, P. Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.764922  DOI: Not available
Keywords: Second Order Stochastic Dominance (SSD) ; Pension funds ; Stochastic Programming (SP) ; Liability Driven Investments (LDI) ; Copula based Scenario Generation
Share: