Strategic Asset Allocation With Liabilities: Beyond Stocks and Bonds

51 Pages Posted: 28 Feb 2005

See all articles by Roy P. M. M. Hoevenaars

Roy P. M. M. Hoevenaars

APG Asset Management

Roderick Molenaar

Robeco Asset Management

Peter C. Schotman

Maastricht University - Department of Finance

Tom Steenkamp

ABP Investments - Research Department

Date Written: February 2007

Abstract

This paper studies the strategic asset allocation for an investor with risky liabilities which are subject to inflation and real interest rate risk and who invests in stocks, government bonds, corporate bonds, T-bills, listed real estate, commodities and hedge funds. Using a vector autoregression for returns, liabilities and macro-economic state variables the paper explores the intertemporal covariance structure of assets and liabilities. We find horizon effects in time diversification, risk diversification, inflation hedge and real interest rate qualities. The covariance structures give insights into which asset classes have a term structure of risk that is different from that of stocks and bonds. The alternative assets classes add value for long-term investors. Differences in strategic portfolios for asset-only and asset-liability investors are due to differences in the global minimum variance and liability hedge portfolio. We find that the benefits of long-term investing are larger when there are liabilities.

Keywords: Strategic asset allocation, asset liability management

JEL Classification: G11, C32

Suggested Citation

Hoevenaars, Roy P. M. M. and Molenaar, Roderick and Schotman, Peter C. and Steenkamp, Tom, Strategic Asset Allocation With Liabilities: Beyond Stocks and Bonds (February 2007). Available at SSRN: https://ssrn.com/abstract=675681 or http://dx.doi.org/10.2139/ssrn.675681

Roy P. M. M. Hoevenaars (Contact Author)

APG Asset Management ( email )

P.O. Box 75283
1070 AG
Amsterdam
Netherlands
+31206048313 (Phone)

Roderick Molenaar

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

Tom Steenkamp

ABP Investments - Research Department ( email )

WTC Schiphol Airport
Tower C, 5th Floor P.O. Box 75753
Schiphol NL-1118 ZX
Netherlands

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