Risk analysis in asset-liability management for pension fund

Abstract. The management of a Life Insurance Company or a Pension Fund must take into account the temporal evolution of its assets and its liabilities. The variables we work here are the factors and returns representing assets and liabilities; as illustration purpose, numerical data have been taken from the Spanish Market. The past performance of these variables is analysed statistically and we deduce a Vector Error Correction Model (VECM) to model their behaviour. In the process of scenario generation we simulate different trajectories for each of the variables (return or factor) with a probability of occurrence associated to each trajectory. Risk is related to adverse results and to a first approximation is measured by the Value at Risk over a given planning horizon together with the calculation of the Expected Shortfall. Finally it is also considered necessary that the portfolio managers should be able to introduce into the calculation their own preferences in the face of risk, so that we complete the analysis by evaluating the fund in terms of the Expected Utility. The practical application of risk analysis carried out according to the results of a scenario generation model constitutes the main contribution of the present work