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- Liability-aware Strategic Asset Allocation
In a nutshell:
- The quality of a Strategic Asset Allocation heavily depends on meaningful and detailed preparation of input parameters. Next to expected returns, covariances, and other factors, the incorporation of liabilities is fundamental in order to build a suitable and robust strategic asset allocation for institutional investors such as insurance companies or pension funds.
- Based on a simplified balance sheet and key-rate durations, we propose a simple, yet effective way of modelling liabilities represented by a market-based swap benchmark in an SAA context.
- We illustrate our findings through an exemplary case study of an average European Life-Insurer showcasing the benefits of this approach in contrast to an optimization from an asset only perspective.
- The proposed framework is easy to implement and also works well for a broad range of optimization techniques from a standard mean-variance optimization as presented here to robust or simulation-based optimization approaches.