Liability Driven Investment
7. Other comments
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Driven Investment is closely allied with Asset Liability Modelling (ALM, aka
Asset Liability Management). ALM can be thought of as involving:
(a) Modelling of how
assets and liabilities might interact, and then
(b) Managing the assets,
liabilities, or both, so that the nature of this interaction is favourable to
Typically in both (a) and
(b) there is some trade-off between risk and reward, suitably defined, for the
sorts of reasons highlighted in 1.4.
what might be described as ‘state-of-the-art’ ALM seems to differ between
insurance/pensions and banking/investment management:
the focus is principally on:
assets and liabilities into the future, and from them also deriving potential
future behaviour of related features, e.g. solvency, free asset ratio; and
(b) The projections are
usually stochastic in nature, i.e. they involve projection of results under
many different scenarios.
In contrast, in banking/investment
management the focus is more often on:
(c) Identifying the
extent of the current mismatch between assets and liabilities; and
(d) Quantifying this
mismatch via Value-at-Risk, tracking error or other similar risk metrics.
apparent difference in focus is explored further in Kemp (2005b) and Kemp
(2009). Part of it is linked to implicit or explicit assumptions about how
rapidly it might be possible for the firms/entities to take remedial action.
The apparently different focus also in part reflects presentational preferences
within the relevant client types.
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