Abstract

http://ssrn.com/abstract=1692519
 
 

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Portfolio Allocation for Public Pension Funds


George Pennacchi


University of Illinois

Mahdi Rastad


Orfalea College of Business, California State Polytechnic University

October 2010

NBER Working Paper No. w16456

Abstract:     
This paper presents a dynamic model of a public pension fund’s choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model’s implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000 to 2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset – liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

Number of Pages in PDF File: 51

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Date posted: October 18, 2010  

Suggested Citation

Pennacchi, George and Rastad, Mahdi, Portfolio Allocation for Public Pension Funds (October 2010). NBER Working Paper No. w16456. Available at SSRN: http://ssrn.com/abstract=1692519

Contact Information

George G. Pennacchi (Contact Author)
University of Illinois ( email )
4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)
HOME PAGE: http://www.business.illinois.edu/gpennacc/
Mahdi Rastad
Orfalea College of Business, California State Polytechnic University ( email )
San Luis Obispo, CA 93407
United States
HOME PAGE: http://www.cob.calpoly.edu/faculty/mahdi-rastad/
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