A stochastic programming approach for multi-period portfolio optimization

Abstract — An Asset-Liability Management model with a novel strategy for controlling risk of underfunding is presented in this paper. The basic model involves Multi-Period decisions (portfolio optimization) and deals with the usual uncertainty of investment returns and future liabilities. Therefore, is it well suited to a stochastic programming approach. We consider the problem of rebalancing policy to accomplish some investment’s criteria. Transaction costs have also been a subject of concern in this paper. In particular, a large amount of transactions usually make asset price move in an unfavorable direction. Therefore, the first problem neglects transactions cost while the second does not. An Asset-Liability Management model with a novel strategy for controlling risk of underfunding is presented in this paper. The basic model involves Multi-Period decisions (portfolio optimization) and deals with the usual uncertainty of investment returns and future liabilities. Therefore, is it well suited to a stochastic programming approach. We consider the problem of rebalancing policy to accomplish some investment’s criteria. Transaction costs have also been a subject of concern in this paper. In particular, a large amount of transactions usually make asset price move in an unfavorable direction. Therefore, the first problem neglects transactions cost while the second does not.