Description: Design and future maintenance of an asset portfolio backing a new line of business is critical for proper asset and liability management for that business. Most portfolio optimization methods utilize linear or quadratic programming and require the user to specify the asset and liability attributes and cash flows into the program. The programmer must also supply an objective function to allow the program to find the optimal asset mix for the associated liabilities. Two problems with this approach are that the liability cash flows are fairly static and that one must frequently rebalance the portfolio. An alternative approach would be to develop a corporate model of both the assets and liabilities and incorporate various economic scenarios as input into the model. Asset strategies would be measured against a specific objective function that is calculated by the corporate model. Unfortunately, the majority of maximization algorithms available are very time consuming, and obtaining a reasonable portfolio mix becomes impractical. This paper overcomes this difficulty by using a very rapid optimization method from the chemical engineering profession called the Floppy Triangle. The paper includes an example of the use of this process to determine an optimal portfolio. It also discusses modifications of the algorithm that is required when the shorting of assets is not permitted.

Description: The main aim of this paper is to apply some of the techniques of modern time series and econometric analysis to analyse investment data in order to better understand the nature of long run relationships in investment series typically used in stochastic investment models. The paper attempts to identify and address fundamental issues that need to be considered before developing a particular stochastic investment model.

Description: This paper addresses the evaluation of long-term returns when the short interest rate is modeled by a general diffusion process. By deriving the long-term return dynamics and invoking the Feyman-Kac formula, the long-term return is represented as the solution of a partial differential equation. A finite difference method is derived for the valuation of the long-term return. The method could be used for hedging interest rate risk, pricing and managing interest rate derivatives and interest rate sensitive insurance products. Numerical examples are included.

Description: This paper presents a new methodology for obtaining fast algorithms and closed form solutions for pricing callable bonds in continuous time models. Results are directly applicable to regulatory scenario testing, immunization and market value accounting.

Description: This paper focuses on the fact that life and annuity reserves that are determined from discounted case flows mask the dynamic nature of interest rates. To study this effect in a stochastic interest environment, the authors look at a change in discounted reserves. By looking at the appropriate measure of change, the paper explores potential short-term consequences of changes in the interest environment.