Over the last two decades, risk-sensitive control has evolved into an innovative and successful framework for solving dynamically a wide range of practical investment management problems. This book shows how to use risk-sensitive investment management to manage portfolios against an investment...

Robert Merton opened a new chapter in finance with his two papers (Merton, 1969; Merton, 1971), reprinted in his book (Merton, 1992), on dynamic asset allocation. Aside from taking a decisive step away from Markowitz-style single-period models, these papers made the key link with stochastic control...

In this chapter, we consider the situation of an investor who manages a portfolio of assets partly funded by an external liability. This is the typical case for banks, insurance companies and hedge funds. Asset and liabilitymanagement (ALM) problems have generated a substantial literature and a...

The problem we have considered so far relates to the finite horizon criterion $$J_{RS}^\theta (t;\,x,\,h)\,: = \, - {1 \over \theta }\ln {\Bbb E}{e^{ - \theta F(t;\,x,\,h)}}$$. There is also a rich literature on risk-sensitive control problems set over an infinite horizon, including Bielecki and...

The Oxford English Dictionary defines a benchmark, or more precisely a ‘bench-mark’, as ‘a surveyor's mark cut in some durable material, as a rock, wall, gate-pillar, face of a building, etc., to indicate the starting, closing, or any suitable intermediate point in a line of levels for the...

The following sections are included:IntroductionFinancial Market, Investment Portfolio and LiabilityFormulation of the Asset and Liability Management ProblemDynamic Programming and the Value FunctionSolving the ALM Problem Under Affine Drift AssumptionsSolving the ALM Problem Under Standard...

In the diffusions setting introduced in Part I, investment management models have a significant benefit: they generate an investment strategy in closed form. This closed form strategy can be transformed, via a fund separation theorem or a fractional Kelly strategy, into a practical recipe for...

In the investment models we have considered so far, the fund manager could set the investment policy freely, as long as the allocation to each of the assets remained finite. In practice the situation is different. Fund managers are subject to investment constraints set by regulatory bodies,...

In Part I of this book, asset prices and factor processes were represented by diffusion processes, driven by correlated Brownian motions. In Part II we extend the theory — using as far as possible the same general approach — to jump-diffusion processes, where the driving Brownian motions are...

Portfolio optimisation models, whether static or dynamic, are inscribed within a much wider portfolio management framework. The current industry standard is the three-step portfolio management process proposed by Maginn et al. (2007). This process finds its roots in Markowitz' famous ‘two...