FINANCIAL RISK MANAGEMENT AND OPERATIONS-RESEARCH

Risk management has become a vital topic for financial institutions in the 1990s. Strategically, asset/liability management systems are impo rtant tools for controlling a firm's financial risks. They manage thes e risks by dynamically balancing the firm's asset and liabilities to a chieve the firm's objectives. We discuss such leading international fi rms as Towers Perrin, Frank Russell, and Falcon Asset Management, whic h apply asset/liability management for efficiently managing risk over extended time periods. Three components of asset/liability management are described: 1) a multi-stage stochastic program for coordinating th e asset/liability decisions; 2) a scenario generation procedure for mo deling the stochastic parameters; and 3) solution algorithms for solvi ng the resulting large-scale optimization problem.