Research by Professor Lionel Martellini, scientific director of the EDHEC-Risk Institute, and Vincent Milhau, research engineer with EDHEC-Risk Institute, have won the First Prize 2009/2010 from the Quantitative Investment Research (Inquire) Europe.
The pair won the prize with their report, “Dynamic Allocation Decisions in the Presence of Funding Ratio Constraints,” which was presented at Inquire’s Autumn Seminar 2009 in Madrid.
Their Madrid presentation was based on research they conducted on “Asset-Liability Management and Institutional Investment Management,” and focused on “funding ratio constraints,” as they relate to institutions’ “reluctance to implement risk-management strategies that are optimal given such short-term constraints.”
They have written a paper on this topic, “Measuring the Benefits of Dynamic Asset Allocation Strategies in the Presence of Liability Constraints.” The paper’s abstract notes that: “The recent pension crisis has triggered a fierce debate in most developed countries between advocates of a tighter regulation designed to provide explicit incentives for pension funds to increase their focus on risk management, and those arguing that imposing short-term funding constraints and solvency requirements on such long-term investors would only increase the cost of pension financing. We analyse this question in the context of a formal continuous-time dynamic asset allocation model for an investor facing liability commitments subject to inflation and interest rate risks. In an empirical exercise, we find that the presence of short-term funding ratio constraints indeed involves a positive welfare cost, but that cost is not found to be prohibitive for reasonable parameter values.”
EDHEC-Risk Institute is part of EDHEC Business School, based in Singapore, Nice and London.
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