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SESSION I-1 : PORTFOLIO MANAGEMENT (20/12/2007 à 08h30)

Ekaterini Panopoulou (University Of Piraeus)

Dynamic Asset-Liability Management for Defined-Benefit Pension Plan

Auteurs : DETEMPLE Jerome (Boston Univ.), RINDISBACHER Marcel (J. Rotman School of Management), ZHOU Jing (Boston Univ)

Intervenants : DETEMPLE Jerome (Boston University School of Management)

Rapporteurs : GOLLIER Christian (Toulouse School of Economics)

A dynamic asset-liability management model for defined-benefit pension plans is developed.
The plan sponsor exhibits features of loss aversion and tolerance for limited shortfalls in assets
under management relative to the liability due. The optimal contribution policy, the optimal
dividend policy and the associated asset allocation rule are derived and analyzed. Sound
Asset-Liability Management is shown to entail future withdrawals from, as well as future
contributions to, the pension fund, even if the current funding shortfall is large. The structure
of the optimal portfolio is discussed. An extension to liabilities with unhedgeable cash flow
components is outlined. A numerical analysis is carried out to examine the behavior of the
optimal policy.

Assets returns volatility and investment horizon: The French case

Auteurs : BEC Frédérique (University of Cergy-Pontoise) and GOLLIER Christian (Toulouse School of Economics)

Intervenants : GOLLIER Christian (Toulouse School of Economics)

Rapporteurs : SALABER Julie (Paris-Dauphine University)

This paper explores French assets returns predictability within a VAR setup. Using quarterly
data from 1970Q4 to 2006Q4, it turns out that bonds, equities and bills returns are actually
predictable. This feature implies that the investment horizon does indeed matter in the asset
allocation. The VAR parameters estimates are then used to compute real returns conditional
volatility across investment horizons. The results reveal the same kind of horizon effect as the
one found in recent empirical studies using quarterly U.S data. More specifically, the annualized
standard deviation of French stocks returns goes down from 2,8% for a 25 year investment
horizon. They suggest that long-horizon investors overstate the share of bonds in their portfolio
choice when neglecting the horizon effect on risk of asset returns predictability.

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Learning or Robust Control

Auteurs : BRANGER Nicole (Univ. of Muenster), SCHLAG Christian (Goethe Univ.), WU Lue (Goethe Univ.)

Intervenants : WU Lue (Goethe University)

Rapporteurs : PRIGENT Jean-Luc (University of Cergy-Pontoise)

Model mis-specification can cause substantial utility losses in portfolio planning. In this
paper, we compare two approaches to cope with this problem, robust control and
learning.We derive the optimal portfolio strategies and the utility losses due to model
mis-specification. Surprisingly, neither learning nor robust control is uniformly superior
to the naive approach where the investor simply ignores model risk. Furthermore, a
comparison of the two approaches shows that learning takes some time to have an
impact, so that short-term investors are in some (but not all) cases better off with robust
control than with learning.

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Utilitarianism and fairness in portfolio positioning

Auteurs : DE PALMA André and PRIGENT Jean-Luc (University of Cergy-Pontoise)

Intervenants : PRIGENT Jean-Luc (University of Cergy-Pontoise)

Rapporteurs : BERNARD Carole (University of Waterloo)

The paper introduces the theory of optimal positioning of financial products. It is illustrated
in the context of long-term intertemporal portfolio allocation and can be applied for example
to asset allocation funds. We embed this problem in location theory : the portfolio is optimized
within the investors’risk aversion dimension. For the CRRA utility functions, we compute
explicitly the distance functions. For the first (utilitarian criterion), the average utility of the
investors is maximized. For the second one (fairness criterion), the choice of portfolio is
optimized so that the average monetary loss due to the lack of customization is minimized.
Given the distribution of investors’ risk aversion, we provide a solution method and an algorithm
to optimally position standardized portfolio along one of these two criteria.

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