S
student08
Member
The core reading in Chapter 15, section 3.3 states "It is worth noting that while many of the uses for such projection systems will involve market-consistent bases, for ALM purposes there will also need to be a real world basis to project asset returns (although the market-consistent basis will still be required for calculating the best estimate liability at future time points)."
Could someone please explain this part? I am confused here because if you are using market-consistent basis then this means using risk-free returns and implied volatility for calibrations of ESG's and if you are using real-world then actual expectation of future will be used for returns and volatilities. How does this mean this ensure consistency between asset and liability projections if we are using different basis?