| Asset Allocation Model on Fully Funded System with Funding Ratio at Risk (FRaR) |
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Yong Gi Kim, Dae Sik Kim, Jaehyun Lee |
| 적립비율 위험(Funding Ratio at Risk) 제약 기반 자산배분 모형 |
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김용기, 김대식, 이재현 |
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| Abstract |
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Asset only approach of asset allocation models does not take the characteristics of funding and investment policies into account. Surplus at risk (SaR) approach tries to incorporate the policy aspects into asset allocation decisions, but cannot cope adequately with the situation in which liability changes due to new borrowings or redemptions. This study attempts to overcome these limitations by suggesting a new approach in which funding ratio at risk (FRaR) is used to hedge the liability risks arising from the changes in liability. In particular, we compares the asset allocation decisions and resulting optimal bond duration from this new approach to those from the SaR models. The main findings of this study are as follows. First, as in SaR models, the FRaR approach assigns lower weight in the risky assets as the funding status improves. Second, in an over-funded state, the optimal bond duration under FRaR becomes longer than that uder SaR, and vice versa. Third, as duration of liability increases, without changing the weight of the risky assets, the duration of bonds tends to increase in both models. Fourth, as the expected growth rate of liability increases, both SaR and FRaR models assign a higher weight of the risky assets and longer duration for bonds in under-funded state, while a lower weight and shorter duration in over-funded state. The FRaR approach can also analyze the situations for which the SaR approach is silent about. For example, the SaR approach is silent about the effects of the interest rate sensitivity of liability growth rate. FRaR approach, however, suggests that with a higher interest sensitivity, in an under-funded state, bond duration should be lower without changing the weight of risky assets, while in a over-funded state, higher. Another example has to do with the idiosyncratic risks of liability. The FRaR approach implies that as the idiosyncratic risks becomes higher, the weight of risky assets and bond duration should decrease. The effects of idiosyncratic risks of liability cannot be investigated within the SaR approach. |
| Key Words:
완전적립방식,자산배분,채권 듀레이션,Asset Allocation,Bond Duratioin,FRaR,Fully Funded System,SaR |
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