Stress-testing of pension fund ALM models with stochastic dominance constraints
The main goal of a pension fund manager is sustainability. We propose an ALM model structured as a multi-stage stochastic programming problem adopting a discrete scenario tree and a multi-objective function. Among other constraints, we consider second order stochastic dominance with respect to a market portfolio. Moreover, we introduce a contamination on the scenario tree with a sample of price shock scenarios to compare optimal solutions under stress-testing. To protect the pension fund from shocks we test also the inclusion of hedge financial contracts in the form of put options. Numerical results show that we can efficiently manage the pension fund satisfying liquidity, return, sponsor’s extraordinary contribution and funding gap targets. Such targets, thanks to the use of the protection contracts, are fulfilled also in case of shock.
Keywords: Asset Liability Management Pension fund Stochastic dominance Contamination
