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Regime Switching based Portfolio Selection for Pension Funds

Karl Frauendorfer & Alvin Schwendener

abstract This paper shows how a mean variance criterion can be applied to a multi period setting in order to obtain efficient portfolios in an asset and liability context. The optimization model allows for rebalancing activities, transaction costs, stochastic volatilities for both assets and liabilities. Furthermore, a general framework for the projection of pension fund liabilities as well as for the generation of asset returns is given. In a further step the dynamics of the liability maturity structure is modeled as customized index, whose volatility and correlation with asset returns become integral components of the applied regime switching approach. The numerical results illustrate the diversification of the assets and its risk return pattern in dependency of the liability dynamics.
   
type journal paper
   
keywords
   
language English
kind of paper journal article
date of appearance 1-8-2007
journal Journal of Banking and Finance
publisher Elsevier (Amsterdam)
ISSN 0378-4266
ISSN (online) 1872-6372
DOI 10.1016/j.jbankfin.2007.02.003
volume of journal 31
number of issue 8
page(s) 2265-2280
review double-blind review
   
citation Frauendorfer, K., & Schwendener, A. (2007). Regime Switching based Portfolio Selection for Pension Funds. Journal of Banking and Finance, 31(8), 2265-2280, DOI:10.1016/j.jbankfin.2007.02.003.