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A multistage stochastic programming asset-liability management model: an application to the Brazilian pension fund industry

Abstract

This paper proposes a multistage stochastic programming approach for the asset-liability management of Brazilian pension funds. We generate asset price scenarios with stochastic differential equations—Geometric Brownian Motion model for stocks and Cox–Ingersoll–Ross model for fixed income securities. Intertemporal solvency regulatory rules for Brazilian pension funds are considered endogenously in the model and enforced with a combinatorial constraint. A VaR probabilistic constraint is incorporated to obtain a positive funding ratio at each time period with high probability. Our approach uses multiple trees to provide a representative characterization of the uncertainty and is not computationally prohibitive. We evaluate the insolvency probability under different initial funding ratios through extensive simulations. The study reveals that the likely decrease of interest rate premiums in the next years will force pension fund managers to significantly change their portfolio strategies. They will have to take more risk in order to deliver the cash flows required to cover the liabilities and satisfy the regulatory constraints.

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Notes

  1. Also called in Portuguese Entidade Fechada de Previdencia Complementar (EFPC).

  2. The resampling method was first published by Michaud (1998).

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Acknowledgments

The authors thank the three anonymous referees and the two associate editors for their valuable comments and suggestions that greatly improved the quality of the paper. This work was funded by the following Brazilian Research Agencies: CAPES and FAPERGS.

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Correspondence to Alan Delgado de Oliveira.

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de Oliveira, A.D., Filomena, T.P., Perlin, M. . et al. A multistage stochastic programming asset-liability management model: an application to the Brazilian pension fund industry. Optim Eng 18, 349–368 (2017). https://doi.org/10.1007/s11081-016-9316-3

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  • DOI: https://doi.org/10.1007/s11081-016-9316-3

Keywords

  • ALM
  • Brazilian pension funds
  • Stochastic optimization
  • Scenario trees