In this paper, we develop and test scenario generation methods for asset liability management models. We propose a multi-stage stochastic programming model for a Dutch pension fund. Both randomly sampled event trees and event trees fitting the mean and the covariance of the return distribution are used for generating the coefficients of the stochastic program. In order to investigate the performance of the model and the scenario generation procedures we conduct rolling horizon simulations. The average cost and the risk of the stochastic programming policy are compared to the results of a simple fixed mix model. We compare the average switching behavior of the optimal investment policies. Our results show that the performance of the multi-stage stochastic program could be improved drastically by choosing an appropriate scenario generation method.

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European Journal of Operational Research
Erasmus School of Economics

Kouwenberg, R. (2001). Scenario generation and stochastic programming models for asset liability management. European Journal of Operational Research, 134(2), 279–292. doi:10.1016/S0377-2217(00)00261-7