Liability-driven investments of life insurers under investment credit risk

In this paper, we present a model of liability-driven investments for life insurers by assuming that equity portfolios can be wiped out by catastrophic default risk of the firms whose stock the life insurer holds. A model of trinomial defaultable asset trees is used and it is calibrated to market data, while a stochastic programming model is set up to solve for the optimal asset allocation strategy of the life insurer to ensure maximization of...