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Cash flow matching: a risk management approach. (English) Zbl 1483.91260

Summary: We propose a scenario-based optimization framework for solving the cash flow matching problem where the time horizon of the liabilities is longer than the maturities of available bonds and the interest rates are uncertain. Standard interest rate models can be used for scenario generation within this framework. The optimal portfolio is found by minimizing the cost at a specific level of shortfall risk measured by the conditional tail expectation (CTE), also known as conditional value-at-risk (CVaR) or tail-VaR. The resulting optimization problem is still a linear program (LP) as in the classical cash flow matching approach. This framework can be employed in situations when the classical cash flow matching technique is not applicable.

MSC:

91G70 Statistical methods; risk measures
91G30 Interest rates, asset pricing, etc. (stochastic models)
93E20 Optimal stochastic control

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References:

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