A Numerical Examination of Asset Liability Management Strategies

This article presents a detailed analysis of asset liability management strategies. In the paper, these strategies are classified according to: (1) static techniques (gap analysis, static duration analysis); (2) dynamic value driven strategies (immunization, key-rate immunization, model-dependent immunization, contingent immunization, portfolio insurance, pay-off distribution optimization), and (3) return driven strategies (spread management, rate of return optimization). Each strategy is analyzed using multi-period framework based on the Vasicek interest rate model. This model is represented through a trinomial interest rate tree. The analysis thus obtains a high degree of comparability with regard to the risks and possible rewards associated to each strategy. The article's final section discusses the potential for application of each strategy, as part of the financial institution's ALM policy.