strategic asset allocation & asset liability management

191 Pages·2007·1.28 MB·English

Strategic asset allocation & asset liability management
Citation for published version (APA):
Hoevenaars, R. P. P. M. (2008). Strategic asset allocation & asset liability management. [Doctoral Thesis,
Maastricht University]. Universiteit Maastricht. https://doi.org/10.26481/dis.20080118rh
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Published: 01/01/2008
DOI:
10.26481/dis.20080118rh
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STRATEGIC ASSET ALLOCATION
&
ASSET LIABILITY MANAGEMENT

STRATEGIC ASSET ALLOCATION
&
ASSET LIABILITY MANAGEMENT
PROEFSCHRIFT
ter verkrijging van de graad van doctor aan de Universiteit Maastricht
op gezag van de Rector Magnificus, Prof. Mr. G.P.M.F. Mols,
volgens het besluit van het College van Decanen, in het openbaar te verdedigen
op vrijdag 18 januari 2008 om 10.00 uur
door
Roy Peter Maria Mathieu Hoevenaars
Promotoren:
Prof. dr. F.C. Palm
Prof. dr. P.C. Schotman
Prof. dr. T.B.M. Steenkamp (Vrije Universiteit Amsterdam)
Beoordelingscommissie:
Prof. dr. C.G. Koedijk (voorzitter)
Prof. dr. C.G.E. Boender (Vrije Universiteit Amsterdam)
Prof. dr. J.-P. Urbain
Prof. dr. L.M. Viceira (Harvard Business School, Harvard University, USA)
Prof. dr. C.C.P. Wolff
Strategic Asset Allocation and Asset Liability Management
ISBN 978-90-9022575-3
Copyright (cid:176)c2008 Roy Hoevenaars
Cover design: based on painting of Henk Severens
All rights reserved. No part of this publication may be reproduced or transmitted
in any form or by any means electronic or mechanical, including photocopying,
recording, or by any information storage and retrieval system, without permission
in writing from the author.
To my mother, my father, Juliette and Joyce

Preface
This PhD dissertation has its origin in the revived academic interest in portfolio
choice for long-term investors at the beginning of this century, and my daily work
in strategic asset allocation and asset liability management at ABP. The thesis is
the result of four and a half years of part-time research at the Quantitative Eco-
nomics and Finance departments at the University of Maastricht. When I started
theresearchinMarch2003,Iwasfascinatedbythebridgebetweeneconometricthe-
ory and investment practice which I experienced in the previous two years of quant
research.
SincetheearlyworkofMertonandSamuelsonitiswidelyadvocatedthatoptimal
portfolio choice is horizon dependent under time-varying investment opportunities.
The 2002 book of John Campbell and Luis Viceira was a big inspiration for my
research. They considered important points for long-term investors. Among them,
the risk of stocks, bonds and T-bills at various investment horizons. For instance,
stocks exhibit lower annualized risk at longer horizons due to mean reversion. I
was challenged by the application of their research to a realistic pension fund with
fair value inflation-linked pension liabilities and an investment universe that goes
beyond stocks, bonds and T-bills. What are the building blocks of a pension fund’s
investmentframework? Whichalternativeassetclassesaddvalueforlong-termasset-
liability investors? Are inflation hedge properties of assets also horizon dependent?
And, howrobustaretimediversificationpropertiesofassets(e.g. meanreversionin
stock returns) to parameter uncertainty in the underlying models? These questions
were the first steps in writing this Ph.D. dissertation. The result is in front of you.
I owe thanks to a number of people who supported, encouraged and motivated
me in many ways. They inspired me to conduct the research next to my daily work
at ABP. I am greatly indebted to my promotors Franz Palm, Peter Schotman and
Tom Steenkamp for all the effort and time they invested in me. Thank you for the
opportunity to do part-time research and the confidence you showed in me. You
were a great team, and you helped me in building a bridge between theory and
vii
viii Preface
practice. Dear Franz, you motivated me at important points in time. You taught
me to consider the research from a broader perspective, and at the same time your
constructive and critical feedback challenged me a lot. Dear Peter, you inspired
me in the many challenging discussions we had during our research projects. You
taught me to be self-critical upon the research, and to concisely document the re-
search. Youreconometricknowledgeandenthusiasticresearchideasencouragedme.
Dear Tom, you stimulated me to examine the applicability of academic models to
practicalinvestmentproblemsinthefieldsofassetallocationandassetliabilityman-
agement. You challenged me to translate theoretical model outcomes into realistic
policy recommendations, thanks.
A next word of gratitude goes to my colleagues at ABP and the University of
Maastricht for their understanding and creating a pleasant working environment. I
thank my roommate at the University Nils Kok for all his inspiring power-lunches
and our conversations. A special word of thank goes to Roderick Molenaar and
Eduard Ponds. You were my co-authors on a number of articles and you motivated
me during our joint research projects. Thank you for the encouragement, support,
advice and critical discussions during the whole Ph.D. project and everything you
taught me. Furthermore, I have certainly benefited from fruitful discussions with
Ralph Koijen and Luis Viceira on early versions on chapters two, three and five
of this dissertation. I have also benefited from my participation in Netspar and
Netspar events, and from challenging questions and insightful conversations with
colleagues and other academics and practicioners, especially Rob Bauer, Michael
Brandt, Frank de Jong and Olaf Sleijpen. I would also like to thank ABP for
providing the opportunity and support for writing this thesis.
Mijn laatste woorden van dank gaan uit naar mijn familie die het meest belan-
grijk voor mij is, en zich tegelijkertijd waarschijnlijk afvraagt waar ik nu eigenlijk
al die tijd mee bezig was. Zeer grote dank gaat naar mijn ouders. Jullie onvoor-
waardelijke liefde, begrip en medeleven maken mij tot wie ik ben. Het vertrouwen
dat jullie in mij hebben en het besef dat jullie altijd voor mij klaar staan zijn een
enormesteun. IkdankookmijnzusJuliette,Paul,RobenNicolettevoorjullieaan-
moediging, vertrouwen en interesse. Joyce, een woord van dank is niet genoeg om
uit te drukken wat je voor me betekent. Je liefde en vertrouwen geven me de kracht
om mijn ambities waar te maken. Je steun en begrip gaven mij de mogelijkheid om
dit proefschrift te realiseren. Bedankt voor de uitdagingen die we samen aangaan.
Zonder jullie steun zou dit proefschrift er niet zijn geweest.
Roy Hoevenaars
Maastricht, November 2007
Contents
Preface vii
1 Introduction 1
1.1 Strategic asset allocation and asset liability management . . . . . . . 2
1.2 Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2 Strategic asset allocation with liabilities 9
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Portfolio choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Return dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3.1 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3.3 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . 24
2.4 Term structures of assets and liabilities . . . . . . . . . . . . . . . . 27
2.4.1 Term structure of risk . . . . . . . . . . . . . . . . . . . . . . 28
2.4.2 Risk diversification . . . . . . . . . . . . . . . . . . . . . . . . 30
2.4.3 Inflation hedging qualities . . . . . . . . . . . . . . . . . . . . 33
2.4.4 Real interest rate hedging qualities . . . . . . . . . . . . . . . 34
2.5 Strategic asset liability management . . . . . . . . . . . . . . . . . . 36
2.5.1 Hedge portfolios . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.5.2 Do alternative asset classes add value for long-term investors? 39
2.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.7 Appendix: Risk and return at various horizons . . . . . . . . . . . . 45
3 Strategic asset allocation for long-term investors 47
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.2 Bayesian modeling framework . . . . . . . . . . . . . . . . . . . . . . 51
3.3 Data and Priors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ix