First NameBram
Last NameMasselink
Supervisor NameDr. O. W. Steenbeek
UniversityErasmus University Rotterdam
KeywordsPension Funds, Economic Crises, Assets Liability Management, Portfolio Optimization, ALM Method, Monte Carlo Method
Publication DateAug 7, 2015

Pension Funds And Economic Crises 2009


The possibility of implementing economic crisis into the generation of economic scenarios using Vector AutoRegressive (VAR) models is studied. This allows pension funds using the Asset Liability Management (ALM) approach to get insight into risks associated with economic downturn. The economic scenarios are generated using two separate algorithms, one for the generation of good and one for bad times. These two are combined to create a scenario which includes economic crisis. This method is compared to a traditional method long term economic dynamics. The purpose of this thesis is to prove that the method introduced can be used, and not to gain a better insight into the risk profile of an individual pension fund The approach discussed in this thesis is a simplified ALM model, which does not incorporate demographic models and incorporates an investment space consisting of stocks and bonds only with different maturity. Despite these limitations, the results clearly demonstrate that it is possible to incorporate economic crisis into ALM models and therefore get a better insight in the pension fund risk profile.


A lot of research has been done in the field of portfolio optimization, for example determining the mean variance global solution portfolio, like (Huberman, Kandel, & Stambaugh, 1987) and (Fama, 1965). For example (Detemple, Garcia, & Rindisbacher, 2003) proposed a new simulation based approach for optimal portfolio allocation in realistic environments including complex dynamics and many state variables, using a Monte Carlo method.

Another interesting field of the ALM method, when applied to pension fund investment strategies, is the use of derivatives for hedging purposes. For example (Palin & Speed, 2003) discuss work in progress with respect to hedging the pension funds funding ratio. (Schotman & Schweitzer, 2000) show that stocks can be used as an inflation hedge even if the stock returns are negatively correlated with unexpected inflation shocks, depending on the investment horizon. Or (Engel, Kat, & Kocken, 2005) who studied how derivatives can hedge interest rates.

However it should be noted that the portfolio optimization and the use of derivatives is beyond the scope of this thesis, as the main purpose of this thesis is introducing a new methodology of generating economic scenarios and its implications of the ALM approach at pension funds. To prove the usability of this method a simplified ALM model is built.

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