Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed contracts at any time. In accounting for asset-liability mismatch risk institution, we present general utility optimization problem in discrete-time setting and provide dynamic programming principle investment strategies. Furthermore, consider an explicit context, including liquidity risk, interest rate, credit intensity fluctuations, show by numerical results that strategy improves both solvency returns compared standard institutional investor’s allocation.