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Dynamic Asset Allocation with Liabilities


  • The authors are grateful to the Editor, John Doukas and three anonymous referees for their constructive comments. Furthermore, the paper has benefited from comments by Andrew Ang, Michael Rockinger, Stephen Zeldes and participants at Fourth Joint BIS-World Bank Public Investors Conference, Washington, DC 2012, at the Dauphine–Amundi Chair in Asset Management 2012 Annual Workshop, Paris 2012 and Nineteenth International Conference ‘Forecasting Financial Markets’, Marseille 2012. The authors are grateful for financial support from the ‘Dauphine-Amundi Chair in Asset Management’. Daniel Giamouridis also greatly acknowledges financial support from the Athens University of Economics and Business Research Center (EP-1681-01, EP-1994-01) and notes that the views expressed in this paper are his own and do not necessarily reflect those of Bank of America Merrill Lynch. Daniel Giamouridis is also affiliated with LUMS, Cass Business School, and the EDHEC-Risk Institute. This work was largely completed when Daniel Giamouridis was an Associate Professor of Finance in the Department of Accounting and Finance at Athens University of Economics and Business. Any remaining errors are the responsibility of the authors.


We develop an analytical solution to the dynamic multi-period portfolio choice problem of an investor with risky liabilities and time varying investment opportunities. We use the model to compare the asset allocation of investors who take liabilities into account, assuming time varying returns and a multi-period setting with the asset allocation of myopic ALM investors. In the absence of regulatory constraints on asset allocation weights, there are significant gains to investors who have access to a dynamic asset allocation model with liabilities. The gains are smaller under the typical funding ratio constraints faced by pension funds.