Strategic assets and liabilities allocations : optimal allocations for sovereign debts and closed defined-benefits pension funds in the presence of longevity risk

In many ways, public debt and pension fund managers share the same allocation problem: How to allocate optimally their assets and liabilities, assuming long-term uncertainties, complex business rules, and risk aversion. In that context, this thesis presents four studies, three from the point of view of public debt managers, and one from the point of view of closed defined benefits (DB) pension fund sponsors. We test the sensitivity of the optimal allocation to unexpected changes in life expectancy, to alternative macroeconomic environments, and to different aspects of pension funds regulation. The first study presents a new stochastic optimization model, based on the minimization of the certainty equivalent real carry cost of public debt, to compute optimal allocations for sovereign debt portfolios. We conduct five sensitivity exercises to test the consequences of different public policies and macroeconomic environments over the optimal liability allocation. The second study presents a stochastic simulation model to evaluate the main costs and risks associated with the issuance of longevity-linked bonds (LB) by governments. We conduct five exercises, in which we test the effects of the transition strategy, the relevance of choosing a correct design for LB, the longevity-risk premium, and two types of demographic shocks to simulate longevity risk. The third study presents a stochastic optimization model to assess the role of longevity-linked bonds in optimal sovereign debt portfolios. This model extends the first study, by incorporating demographic effects in fiscal policy, as well as the issuance of LB by governments. We conduct three exercises in which we test how the optimal allocation reacts to two types of demographic shocks and to alternative levels of the longevity-risk premium. The last study proposes a strategic asset allocation model for closed and mature DB schemes. The optimization criterion is to minimize a certainty equivalent cost for the pension scheme's sponsor that is defmed as the expected present value of the additional financial contributions (AFC) plus a fraction of their variance, the fraction characterizing the sponsor's risk attitude. AFC are determined by a rule that depends on the current funding ratio (FR), and two thresholds (minimum and maximum FR). We analyze four factors that influence the optimal asset mix: (i) the uncertainty about the remaining life expectancy of the beneficiaries, (ii) the expected equity return above a real (inflation adjusted) risk free rate, (iii) the time to restore the FR to normal levels, and (iv) the extent to which the sponsor can benefit from an asset surplus.EThOS - Electronic Theses Online ServiceGBUnited Kingdo