Dynamic Asset (and Liability) Management under Market and Credit Risk

We introduce a modelling paradigm which integrates credit risk and marketrisk in describing the random dynamical behaviour of the underlying fixed income assets.We then consider an asset and liability management (ALM) problem and develop a mul-tistage stochastic programming model which focuses on optimum risk decisions. Thesemodels exploit the dynamical multiperiod structure of credit risk and provide insightinto the corrective recourse decisions whereby issues such as the timing risk of default isappropriately taken into consideration. We also present a index tracking model in whichrisk is measured (and optimised) by the CVaR of the tracking portfolio in relation to theindex. Both in- and out-of-sample (backtesting) experiments are undertaken to validateour approach. In this way we are able to demonstrate the feasibility and flexibility ofthe chosen framework.