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result(s) for
"Asset-liability management Simulation methods."
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Mean–Variance Asset–Liability Management Problem Under Non-Markovian Regime-Switching Models
In this paper, we study an asset–liability management problem under a mean–variance criterion with regime switching. Unlike previous works, the dynamics of assets and liability are described by non-Markovian regime-switching models in the sense that all the model parameters are predictable with respect to the filtration generated jointly by a Markov chain and a Brownian motion. The problem is solved with the aid of backward stochastic differential equations (BSDEs) and bounded mean oscillation martingales. An efficient strategy and an efficient frontier are obtained and represented by unique solutions to several relevant BSDEs. We show that the optimal capital structure can be achieved when the initial asset value is expressed by a linear combination of the initial liability and the expected surplus. It is further found that a mutual fund theorem holds not only for the efficient strategy, but also for the optimal capital structure.
Journal Article
Mean-Variance Asset-Liability Management in a Non-Markovian Regime-Switching Jump-Diffusion Market with Random Horizon
This paper investigates the problem of mean-variance asset-liability management (ALM) in a market where the dynamics of assets are non-Markovian regime-switching models driven by a Brownian motion, a Poisson random measure and a continuous time finite-state Markov chain. It is assumed that the time horizon is uncertain relying not only on asset prices and liability values, but also on other factors. The insurer aims to minimize the variance of the terminal surplus given an expected terminal surplus subject to the risk of paying out random liabilities of an extensive Cramér-Lundberg model. By further developing the solvability of a linear backward stochastic differential equation (BSDE) with two types of jumps, namely jumps modelled by a Poisson random measure and by basic martingales related to a Markov chain, closed-form expressions for both the efficient strategy and the efficient frontier are obtained and represented by unique solutions to several relevant BSDEs.
Journal Article
The Magnus Expansion for Stochastic Differential Equations
In this paper, all the terms in the stochastic Magnus expansion are presented by rooted trees. First, stochastic Magnus methods for linear stochastic differential equations are constructed by truncating the stochastic Magnus expansion. Then, explicit stochastic Magnus methods are constructed by Picard’s iteration for nonlinear stochastic differential equations on matrix Lie group. Furthermore, general nonlinear stochastic differential equations are transformed into linear operator stochastic differential equations by using the Lie derivative. Finally, numerical methods for general nonlinear stochastic differential equations are constructed by using the theory of the stochastic Magnus expansion for the linear case. In particular, for the commutative case, it is shown that the stochastic Magnus expansion provides a novel way to construct computationally inexpensive and arbitrarily high-order numerical methods while avoiding the simulation of multiple stochastic integrals. Moreover, the proposed methods are shown to preserve the intrinsic properties of the original system well and the numerical experiments agree with the theoretical results.
Journal Article
Efficient Model Points Selection in Insurance by Parallel Global Optimization Using Multi CPU and Multi GPU
In the insurance sector, Asset Liability Management refers to the joint management of the assets and liabilities of a company. The liabilities mainly consist of the policies portfolios of the insurance company, which usually contain a large amount of policies. In the article, the authors mainly develop a highly efficient automatic generation of model points portfolios to represent much larger real policies portfolios. The obtained model points portfolio must retain the market risk properties of the initial portfolio. For this purpose, the authors propose a risk measure that incorporates the uncertain evolution of interest rates to the portfolios of life insurance policies, following Ferri (Optimal model points portfolio in life, 2019, arXiv:1808.00866). This problem can be formulated as a minimization problem that has to be solved using global numerical optimization algorithms. The cost functional measures an appropriate distance between the original and the model point portfolios. In order to solve this problem in a reasonable computing time, sequential implementations become prohibitive, so that the authors speed up the computations by developing a high performance computing framework that uses hybrid architectures, which consist of multi CPUs together with accelerators (multi GPUs). Thus, in graphic processor units (GPUs) the evaluation of the cost function is parallelized, which requires a Monte Carlo method. For the optimization problem, the authors compare a metaheuristic stochastic differential evolution algorithm with a multi path variant of hybrid global optimization Basin Hopping algorithms, which combines Simulated Annealing with gradient local searchers (Ferreiro et al. in Appl Math Comput 356:282–298, 2019a). Both global optimizers are parallelized in a multi CPU together with a multi GPU setting.
Journal Article
Replicating portfolio approach to capital calculation
The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset–liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that our RP approach yields asymptotically consistent capital estimators if the chaotic representation property holds. We illustrate the tractability of the RP approach by three numerical examples.
Journal Article
Calibrating the factors of management quality in banking performance: a mixed method approach
Purpose
This paper aims to explore and model the factors of management quality dimension (FMQD) in evaluating banking performance.
Design/methodology/approach
The FMQD in evaluating banking performance are explored through the review of literature. The identified factors are modeled using integrated fuzzy cognitive map (FCM) and Matrices’ Impacts Croise’s Multiplication Appliquée a UN Classement (MICMAC) approach. Scenario analysis is carried out on the proposed model to study the behavior in a dynamic setting.
Findings
The main finding of this study is the prioritization of FMQD in evaluating banking performance. The cohesive model obtained by FCM-MICMAC integrated approach demonstrates that the interlinked factors can be grouped into independent, autonomous, dependent and relay clusters. The results suggest that internal control system is the most influential factor, whereas the business per employee is the most sensitive one in modeling management quality.
Research limitations/implications
This study models the FMQD through expert opinions, and hence, individual bias may influence the results. This study can be further validated through statistical analysis.
Practical implications
The study suggests that practitioners may focus more on these select factors and their mutual interactions to enhance management quality for improving the performance of the banks. The study emphasizes that better clarity and efficient designing of internal processes are the key to management soundness.
Originality/value
This is the first study to explore and model FMQD in banking performance using FCM-MICMAC approach. Validation of the proposed model in a dynamic setting is also relatively new in the banking performance literature.
Journal Article
Measuring Interest Rate Risk with Embedded Option Using HPL-MC Method in Fuzzy and Stochastic Environment
Under the condition of continuous innovation of financial derivatives and marketization of interest rate, interest rates fluctuate more frequently and fiercely, and the measurement of interest rate risk also attracts more attention. Under the premise that the fluctuation of interest rate follows fuzzy stochastic process, based on the option characteristics of financial instruments with embedded option, this paper takes effective duration and effective convexity as tools to measure interest rate risk when embedded options exist, tries to choose CIR extended model as term structure model, and uses the Monte Carlo method for hybrid low deviation sequences (HPL-MC) to analyze the prepayment characteristics of MBS, a representative financial instrument with embedded options, when interest rates fluctuate; on this basis, the effectiveness of effective duration management of interest rate risk is demonstrated with asset liability management cases of commercial banks.
Journal Article
Dealing with low interest rates in life insurance: An analysis of additional reserves in the German life insurance industry
Interest rates have been very low for several years, which is particularly challenging for life insurers. Since 2001, German life insurers have had to set an additional reserve due to low interest rates to ensure the protection of policyholders. However, the method introduced at that time to calculate these reserves was criticized, therefore, the German Federal Ministry of Finance replaced it with a new approach. In this article, we investigated the effects of the different methods on a typical German life insurer in various future interest rate scenarios and from various perspectives. For this purpose, we modelled such a life insurer holistically, considered its asset liability management and projected its future development in different interest rate scenarios using simulation techniques. Taking into account dependencies between assets, liabilities and interest rates, we analyzed and discussed our results from the life insurer's, equity holders', policyholders' and regulators' perspectives. The results show that the new method eliminated the weaknesses of the previous one and seems to be a suitable alternative to determine the additional reserve.
Journal Article