Skip to main content
Log in

Asset/liability management under uncertainty for fixed-income securities

Annals of Operations Research Aims and scope Submit manuscript

Cite this article


Short-sighted asset/liability strategies of the seventies left financial intermediaries — banks, insurance and pension fund companies, and government agencies — facing a severe mismatch between the two sides of their balance sheet. A more holistic view was introduced with a generation ofportfolio immunization techniques. These techniques have served the financial services community well over the last decade. However, increased interest rate volatilities, and the introduction of complex interest rate contingencies and asset-backed securities during the same period, brought to light the shortcomings of the immunization approach. This paper describes a series of (optimization) models that take a global view of the asset/liability management problem using interest rate contingencies. Portfolios containingmortgage-backed securities provide the typical example of the complexities faced by asset/liability managers in a volatile financial world. We use this class of instruments as examples for introducing the models. Empirical results are used to illustrate the effectiveness of the models, which become increasingly more complex but also afford the manager increasing flexibility.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others


  1. D.F. Babbel and S.A. Zenios, Pitfalls in the analysis of option-adjusted spreads, Fin. Anal. J. (July/August, 1992) 65–69.

  2. F. Black, E. Derman and W. Troy, A one-factor model of interest rates and its application to treasury bond options, Fin. Anal. J. (Jan./Feb. 1990) 33–39.

  3. P. Boyle, Options: A Monte Carlo approach, J. Fin. Econ. 4(1977)323–338.

    Article  Google Scholar 

  4. S.P. Bradley and D.B. Crane, A dynamic model for bond portfolio management, Manag. Sci. 19(1972)139–151.

    Google Scholar 

  5. P.E. Christensen and F.J. Fabozzi, Bond immunization: An asset liability optimization strategy, in:The Handbook of Fixed Income Securities, ed. F.J. Fabozzi and I.M. Pollack (Dow Jones Irwin, 1987).

  6. J.C. Cox, Jr., E. Ingersoll and S.A. Ross, A theory of the term structure of interest rates, Econometrica 53(1985)385–407.

    MathSciNet  Google Scholar 

  7. C. Vassiadou-Zeniou and S.A. Zenios, Robust optimization models for managing callable bond portfolios, Euro. J. Oper. Res. (1995).

  8. H. Dahl, A. Meeraus and S.A. Zenios, Some financial optimization models: I. Risk management, in:Financial Optimization, ed. S.A. Zenios (Cambridge University Press, 1993) pp. 3–36.

  9. G.B. Dantzig, Linear programming under uncertainty, Manag. Sci. 1(1955)197–206.

    Google Scholar 

  10. B. Golub, M. Holmer, R. McKendall, L. Pohlman and S.A. Zenios, Stochastic programming models for money management, Euro. J. Oper. Res. (1995).

  11. R.R. Grauer and N.H. Hakansson, Returns on levered actively managed long-run portfolios of stocks, bonds and bills, Fin. Anal. J. (Sept. 1985) 24–43.

  12. R.S. Hiller and J. Eckstein, Stochastic dedication: Designing fixed income portfolios using massively parallel Benders decomposition, Manag. Sci. 39(1994)1422–1438.

    Article  Google Scholar 

  13. M.R. Holmer, The asset/liability management system at Fannie Mae, Interfaces 24(1994)3–21.

    Google Scholar 

  14. J.M. Hutchinson and S.A. Zenios, Financial simulations on a massively parallel Connection Machine, Int. J. Supercomp. Appl. 5(1991)27–45.

    Google Scholar 

  15. J.E. Ingersoll, Jr.,Theory of Financial Decision Making, Studies in Financial Economics (Rowman and Littlefield, Totowa, NJ, 1987).

    Google Scholar 

  16. H. Konno and H. Yamazaki, Mean-absolute deviation portfolio optimization model and its applications to Tokyo stock market, Manag. Sci. 37(1991)519–531.

    Google Scholar 

  17. H. Markowitz, Portfolio selection, J. Fin. 7(1952)77–91.

    Google Scholar 

  18. H. Markowitz,Mean-Variance Analysis in Portfolio Choice and Capital Markets (Basil Blackwell, Oxford, 1987).

    Google Scholar 

  19. J.M. Mulvey and H. Vladimirou, Stochastic network optimization models for investment planning, Ann. Oper. Res. 20(1989)187–217.

    MathSciNet  Google Scholar 

  20. J.M. Mulvey and S.A. Zenios, Capturing the correlations of fixed-income instruments, Manag. Sci. 40(1994)1329–1342.

    Article  Google Scholar 

  21. R.B. Platt (ed.),Controlling Interest Rate Risk, Wiley Professional Series in Banking and Finance (Wiley, New York, 1986).

    Google Scholar 

  22. R.J-B Wets, Stochastic programs with fixed resources: The equivalent deterministic problem, SIAM Rev. 16(1974)309–339.

    Article  Google Scholar 

  23. K.J. Worzel, C. Vassiadou-Zeniou and S.A. Zenios, Integrated simulation and optimization models for tracking fixed-income indices, Oper. Res. 42(1994)223–233.

    Google Scholar 

  24. S.A. Zenios, Massively parallel computations for financial modeling under uncertainty, in:Very Large Scale Computing in the 21st Century, ed. J. Mesirov (SIAM, Philadelphia, PA, 1991) pp. 273–294.

    Google Scholar 

Download references

Author information

Authors and Affiliations


Rights and permissions

Reprints and Permissions

About this article

Cite this article

Zenios, S.A. Asset/liability management under uncertainty for fixed-income securities. Ann Oper Res 59, 77–97 (1995).

Download citation

  • Issue Date:

  • DOI: