Research On Optimization Model Of Total Assets And Liabilities Based On Stochastic Duration

Asset-Liability Management (ALM) is to achieve optimal allocation of assets under the constraints on the number and structure of the liabilities for financial institutions, such as banksand insurance companies. By persuing assets liquidity, profitability and safety, financial institutions manage to realize the maximization return of portfolio with risk controlled.Bank assets is equal to bank liabilities plus owner's equity. The market interest rate changes will lead to the change of value of bank assets and liabilities, which then leads to changes in owners' equity of bank, affects shareholder interests. Interest rate change is inevitable.For control of the bank risk of changes in owners' equity, it is necessary to build bank assets and liabilities optimization model based on interest risk immunization.Bank assets and liabilities portfolio can be divided into two parts, existing portfolio and incremental portfolio. Among them, the existing portfolio is the assets or liabilities that has been configured in the past, such as the issued loans.Incremental portfolio refers to the assets and liabilities that are determine to issue at the moment, such as loans that will be issued today. In fact, bankers highly focus on risk control of all the combination of existing portfolio and incremental portfolio.In this paper, through the interest risk immunization condition that stochastic duration gap of total assets and liabilities is zero, a total assets and liabilities optimization model is established, controlling interest risk of all the combination of existing portfolio and incremental portfolio.This paper consists of five parts.First chapter is the introduction. By introducing the background and significance of the topic, we analyze the nature of issue that brings stochastic duration into optimization model of whole bank, and sort out the study of the status quo of asset-liability management and stochastic duration. Then we point out the main innovations and features of this article.The second chapter is constructing Vasicek interest rate model. In order to construct the stochastic duration, we first need to construct the term structure of interest rate. Term structure is a curve of a time period corresponding to a variety of interest rates, it's the foundation and key to financial asset pricing, risk management and financial derivatives construction. By using overnight rate of Shanghai Interbank Offered Rate (SHIBOR), we construct the interest rate term structure based on Vasicek model, building the foundation for the following stochastic duration.The third chapter is the construction of stochastic duration. Based on the Vasicek term structure model of chapter 2, the expressions of the stochastic duration is derived. In addition, we select 10 most traded coupon bonds of China as samples to fitt the expected market rate. Through the calculation of one-year bank loan stochastic duration, we shows the steps to calculate the stochastic duration of each assets and liabilities.The fourth chapter is the asset-liability optimization model based on stochastic duration immunization. The objective function is the total income of each asset portfolio of banks. Using the stochastic duration to control interest rate risk, we supplement the existing laws and regulations as the constraint conditions, and establish total assets and liabilities optimization model based on stochastic duration immunization, and demonstrate the rationality of the model through numerical example.The main innovation and characteristics of this paper are as fowllows.First, by considering the existing portfolio risk in the asset allocation, we establish total asset and liability interest rate immunization conditions, taking into consideration of the existing portfolio risk and increment portfolio risk, which change the existing research that does not consider total asset and liability risk when performing asset allocation.Second, using stochastic duration to controll the total asset and liability interest rate risk. By making stochastic duration of portfolio assets equals to corresponding stochastic duration of portfolio liabilities, we guarantee the degree of interest rate influence is the same, which changes the existing duration that can not accurately identify the random variation of interest rate.Third, using portfolio earnings as the objective function to maximize bank's assets, supplemented by existing laws and regulations as the constraint conditions, in order to establish all assets and liabilities portfolio model based on stochastic duration immunization, which changes the existing research, that although the stochastic duration applied to ALM, but did not propose how to use stochastic duration constraints to achieve the control of interest rate risk.