Asset / Liability VAR-COV Matrix -- Portfolio Optimization

[martingeorge]

Hi everyone,

I am trying to implement Sharpe & Tint's 1990 paper on portfolio optimization with assets and liabilities.

A difficulty I run into was the estimation of the variance-covariance matrix for assets and liabilities.
Liabilities' prices cannot be observed on the markets as these do not trade.

So you can only estimate/replicate liabilities through assets that are marketable. But how to estimate a reliable variance-covariance matrix for the two (assets and replicated liabilities)?

Thanks!

 

[Ken Abbott]

Liabilities like what? Debt instruments? Those won't be MTM like the assets. If you want to treat them like MTM instruments, use the Bloomberg generic curves or BB total return indices (The TR indices takes the need for convexity adjustment away).