Asset Liability Management — Instruments and Approaches

Abstract

The shift by institutional investors toward financial modeling techniques that consider risk exposures from both sides of the balance sheet has led to an increased focus on modeling institutional liabilities and their relationship to economic developments. While liability modeling in itself is not new, the use of these liability models within holistic or enterprise-wide modeling systems is a fairly recent endeavor that favors the use of a simulation approach to model both the assets and the liabilities of an institution. This chapter will discuss some of the issues involved in modeling the liabilities in a simulation approach. Section one will describe the benefits of using simulation over an analytic approach. Section two will give some examples of liability simulation approaches used in asset-liability management applications. We will end this chapter with a discussion of some of the difficulties and potential pitfalls of using a simulation approach to model liabilities.