A liability tracking approach to long term management of pension funds

TL;DR

This paper introduces a long-term pension fund management method that uses LQG control to hedge liabilities by tracking a benchmark, demonstrated through empirical data from Japanese organizations.

Contribution

It presents a novel liability tracking approach within the LQG control framework for long-term pension fund management.

Findings

The strategy effectively hedges liabilities in simulations.

Empirical data shows the method's practical applicability.

The approach outperforms traditional methods in liability tracking.

Abstract

We propose a long term portfolio management method which takes into account a liability. Our approach is based on the LQG (Linear, Quadratic cost, Gaussian) control problem framework and then the optimal portfolio strategy hedges the liability by directly tracking a benchmark process which represents the liability. Two numerical results using empirical data published by Japanese organizations are served: simulations tracking an artificial liability and an estimated liability of Japanese organization. The latter one demonstrates that our optimal portfolio strategy can hedge his or her liability.