The BNP Paribas Investment Partners "Asset-Liability Management and Institutional Investment Management" Research Chair will be piloted by a joint BNP Paribas Investment Partners/EDHEC-Risk Institute committee and will give rise to a major three-year research programme.

The chair, under the responsibility of Lionel Martellini, the Scientific Director of EDHEC-Risk Institute, will examine dynamic allocation strategies in asset-liability management in order to formulate an integrated ALM model.

The results of the initial research project, relating to dynamic allocation strategies in ALM and illustrated by case studies on life insurance, retirement schemes and pension funds in Europe, were presented at the EDHEC-Risk Institutional Days at the CNIT in Paris on June 12 and 13, 2008.

[Press release announcing the launch of the research chair: 08/10/07]

Research output:

Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints
February 2013
Romain Deguest, Lionel Martellini, Vincent Milhau
This study provides comprehensive insights into all of EDHEC-Risk Institute’s research on dynamic allocation in asset-liability management. The publication builds on these previous findings and illustrates that failing to separate long-term risk-aversion and short-term loss-aversion may lead to poor investment decisions. Relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control short-term risk levels while maintaining access to long-term sources of performance. These solutions are a substantial improvement over traditional strategies without dynamic risk-control, which inevitably lead to underspending of investors' risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors' risk budget in extreme market conditions.

Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk
February 2012
Lionel Martellini, Vincent Milhau, Andrea Tarelli
This paper aims to go beyond simple forms of dynamic strategies, and to show that more sophisticated dynamic allocation strategies could usefully be implemented by pension funds. For instance, it shows that imposing a cap on the funding ratio, in addition to a floor, has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value. The paper also introduces novel forms of dynamic strategies that recognise that pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the sponsor company. These strategies aim to control sponsor risk by avoiding states of the world where the pension fund is underfunded and the sponsor is unable to make up for the gap. [Press release announcing the publication of the research: 23/05/12]

An Integrated Approach to Asset-Liability Management: Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams
Previous version: November 2010; This version: June 2011
Lionel Martellini, Vincent Milhau
Correctly assessing the value of a pension plan in deficit with a weak sponsor company is a real challenge given that no comprehensive model is currently available for the joint quantitative analysis of capital structure choices, pension fund allocation decisions and their impact on rational pricing of liability streams. This paper is an attempt to fill this gap by analyzing the valuation of pension liabilities regarded as defaultable claims issued by the sponsor company to workers and pensioners in the context of an integrated model of capital structure. Our results show that leverage decisions have a strong impact on the fair value of pension liabilities, and conversely that the presence of a pension plan decreases the optimal leverage ratio. We also find that interior optimal values may exist for allocation decisions. [Press release announcing the publication of the research: 10/12/10]

Measuring the Benefits of Dynamic Asset Allocation Strategies in the Presence of Liability Constraints
March 2009
Lionel Martellini, Vincent Milhau
The results of the study suggest that it is not so much the presence of funding ratio constraints that is in itself costly for pension funds as their reluctance to implement risk-management strategies that are optimal given such short-term constraints.

According to EDHEC-Risk Institute, dynamic risk-management strategies can turn irreversible contributions into reversible contributions and short-term constraints into long-term constraints, hence the severe opportunity cost for pension funds that do not follow them. [Press release announcing the publication of the research: 18/06/09]

Related research:

New Frontiers in Benchmarking and Liability-Driven Investing
September 2010
Noël Amenc, Lionel Martellini, Felix Goltz, Vincent Milhau
This paper argues that novel forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies.

Managing Pension Assets: from Surplus Optimization to Liability Driven Investment
March 2006
Lionel Martellini
A paper introducing a formal continuous-time model of intertemporal asset allocation decisions in the presence of liability constraints, and discussing how recent industry trends such as liability-driven investment fit with respect to the theoretical optimally designed strategies.

About BNP Paribas Investment Partners

BNP Paribas Investment Partners is the dedicated asset management business line of the BNP Paribas Group. BNP Paribas Investment Partners offers a full range of investment management products and services to institutional and corporate, as well as retail clients across the globe.

With total assets under management of EUR 503 billion (USD 664 billion) as of 31 December 2012, BNP Paribas Investment Partners is the sixth-largest asset manager in Europe and amongst the twenty largest asset managers worldwide. BNP Paribas Investment Partners has asset management capabilities in 40 countries, and distribution in over 70 countries. It has offices in all of the world's major financial centres, including Hong Kong, London, New York, Paris and Tokyo.

Central to the way we work is the concept of partnership and close relationships, both with our clients and across our network of some 60 investment centres, where about 800 investment professionals work on all major asset classes, each a specialist in a given strategy, asset class or type of product.

BNP Paribas Investment Partners combines the financial strength, powerful distribution and compliance focus of its parent company with the reactivity, specialisation and entrepreneurial spirit of smaller boutiques.

BNP Paribas Investment Partners provides a broad range of expertise, both for global and local solutions from its various affiliates.

Contact:

Website: www.bnpparibas-ip.com