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Asset-Liability Management Modelling with Risk Control by Stochastic Dominance Xi Yang ∗ Jacek Gondzio † Andreas Grothey ‡ School of Mathematics and Maxwell Institute for Mathematical Sciences University of Edinburgh James Clerk Maxwell Building King’s Buildings Mayfield Road Edinburgh EH9 3JZ U.K. Technical Report ERGO-09-002, January 15th, 2009 ∗University of Edinburgh, UK, X.Yang@ed.ac.uk †University of Edinburgh, UK ‡University of Edinburgh, UK 1 Abstract An Asset-Liability Management model with a novel strategy for controlling risk of under- funding is presented in this paper. The basic model involves multiperiod decisions (portfolio rebalancing) and deals with the usual uncertainty of investment returns and future liabilities. Therefore it is well-suited to a stochastic programming approach. A stochastic dominance concept is applied to measure (and control) risk of underfunding. A small numerical ex- ample is provided to demonstrate advantages of this new model which includes stochastic dominance constraints over the basic model. Adding stochastic dominance constraints comes with a price. It complicates the structure of the underlying stochastic program. Indeed, new constraints create a link between variables associated with different scenarios of the same time stage. This destroys the usual tree- structure of the constraint matrix in the stochastic program and prevents the application of standard stochastic programming approaches such as (nested) Benders decomposition. A struc