TY  - JOUR
AU  - Binsbergen,Jules H. van
AU  - Brandt,Michael W.
TI  - Optimal Asset Allocation in Asset Liability Management
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12970
PY  - 2007
Y2  - March 2007
UR  - http://www.nber.org/papers/w12970
L1  - http://www.nber.org/papers/w12970.pdf
N1  - Author contact info:
Jules van Binsbergen
Graduate School of Business
Stanford University
518 Memorial Way
Stanford, CA 94305-5015
Tel: 650-721-1353
Fax: 650-725-9932
E-Mail: jvb2@gsb.stanford.edu

Michael W. Brandt
Fuqua School of Business
Duke University
Box 90120
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu
AB  - We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.
ER  -