Asset-Liability Management with Epstein-Zin Utility under Stochastic Interest Rate and Unknown Market Price of Risk

Battle Count: 94

Highly relevant for institutional quantitative trading and portfolio management. Provides explicit formulas for optimal consumption and investment strategies under realistic market conditions (stochastic rates, stochastic volatility, unobservable risk premium). The Malliavin-based representation enables practical Monte Carlo implementation. The welfare loss quantification directly informs the economic value of information in trading decisions. However, it is primarily a theoretical framework rather than a directly implementable trading algorithm.

The theoretical framework is highly complex, involving coupled FBSDEs, Malliavin calculus, stochastic filtering, and change of measure techniques. However, the final explicit formulas for optimal strategies (Theorem 3.10) and the Monte Carlo representation via Malliavin derivatives (Proposition 3.13) make numerical implementation feasible. The decoupling reduction to forward SDEs simplifies computation. Requires expertise in stochastic analysis, BSDE theory, and Malliavin calculus for full implementation.

The paper provides explicit analytical formulas for optimal strategies and value functions. Numerical results use Monte Carlo simulation with 1,000,000 paths and specified parameter values. However, no code or data repository is provided. The mathematical derivations are complete with proofs in appendices, enabling theoretical reproduction.