2012
EMSS 2012 Proceeding
A new practical approach to asset liability management for BASEL III and SOLVENCY II
Authors: Vojo Bubevski
Abstract
A new practical approach to Asset Liability Management (ALM) is proposed, which combines Monte Carlo Simulation, Optimisation and Six Sigma Define, Measure, Analyse, Improve, Control (DMAIC) methodology. This new method determines an optimally diversified minimal variance investment portfolio, which gains a desired range of return with minimal financial risk. Simulation and optimisation are conventionally applied to find the optimal portfolio to provide the required return. In addition, the Six Sigma DMAIC methodology is used to measure and improve the portfolio management process in order to establish the optimally diversified portfolio. Applying Six Sigma DMAIC to the portfolio management process is an improvement in comparison with conventional stochastic ALM risk models. It offers financial institutions internal model options for Basel III and Solvency II, which can help them to reduce their capital requirements and Value-at-Risk (VaR) providing for higher business capabilities and increasing their competitive position, which is their ultimate objective.
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