Fat tails and optimal LDI portfolios

A portfolio optimisation technique for pension funds and insurance portfolios is presented


Jan Rosenzweig looks at optimal liability-driven portfolios in a family of fat-tailed and extremal risk measures, primarily in the context of pension fund and insurance fixed cashflow liability profiles, but also portfolios arising in derivatives books (such as delta-one books or options books) in the presence of stochastic volatilities. In the extremal limit, a new tail risk measure is recovered – extreme deviation (XD) – which is significantly more sensitive to

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