Optimal Strategy for Asset-Liability Management under Regime-Switching

DOI: https://doi.org/10.62517/jse.202511508

Author(s)

Chang Yuan*, Peng Li

Affiliation(s)

North China University of Water Resources and Electric Power, Zhengzhou, Henan, China *Corresponding Author

Abstract

To capture the interactive effects of market liquidity regimes, price impacts, and liability levels on investment strategies, a Markov regime-switching mechanism is incorporated into asset-liability management, establishing a stochastic optimal control model with state-dependent liability processes. The results indicate that the liability growth rate influences strategy selection by altering investors’ risk tolerance and repayment pressure: investors adopt conservative strategies to hedge against repayment risk under high growth rates, while pursuing aggressive strategies for higher returns under low growth rates. Regime transitions in market liquidity moderate the aggressiveness of strategies, and the joint effect of liabilities and market frictions further influences the adjustment speed and long-term robustness of trading strategies.

Keywords

Markov Regime Switching; Liabilities; Stochastic Optimal Control Model; Hamilton-Jacobi-Bellman (HJB) Equation; Riccati Differential Equation System

References

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