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Liability-Driven Investment for Pension Funds: Stochastic Optimization with Real Assets

Jang, C., Clare, A. ORCID: 0000-0002-4180-6778 & Owadally, I. ORCID: 0000-0002-0830-3554 (2024). Liability-Driven Investment for Pension Funds: Stochastic Optimization with Real Assets. Risk Management,


Using a multi-stage stochastic programming method, we suggest an optimal liability-driven investment (LDI) strategy for a closed defined-benefit pension fund including real assets. The objective is to jointly optimize contribution, funding ratio, and buyout cost, subject to a constraint on downside risk in terms of expected shortfall of assets relative to liabilities. Over a 10-year planning horizon, the optimal LDI strategy with a key-rate duration-matching bond portfolio outperforms the corresponding strategy with a duration-convexity matching bond portfolio as well as a strategy with an aggregate bond index-tracking portfolio. When real assets are introduced, the optimal LDI strategy includes significant investment in infrastructure and real estate, illiquidity notwithstanding. Nevertheless, delays in sales of real assets induced by illiquidity can increase downside risk.

Publication Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article that will be published in Risk Management. The definitive publisher-authenticated version will be available online at:
Publisher Keywords: Liability-driven investment, Pension fund, Real assets, Stochastic programming
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Actuarial Science & Insurance
[thumbnail of RM_main_ver2_0_2_CRO.pdf] Text - Accepted Version
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