Optimal Portfolio Allocation for Corporate Pension Funds
Imperial College Business School
The Bank of England; University of London - Imperial College Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)
CEPR Discussion Paper No. DP8198
We model the asset allocation decision of a stylized corporate defined benefit pension plan in the presence of hedgeable and unhedgeable risks. We assume that plan fiduciaries -- who make the asset allocation decision -- face non-linear payoffs linked to the plans funding status because of the presence of pension insurance and a sponsoring employer who may share any shortfall or pension surplus. We find that even simple asymmetries in payoffs have large and highly persistent effects on asset allocation, while unhedgeable risks exert only a small effect. We conclude that institutional details are crucial in understanding DB pension asset allocation.
Number of Pages in PDF File: 51
Keywords: corporate balance sheets, pension funds, portfolio allocation
JEL Classification: G11, G23, G32working papers series
Date posted: January 31, 2011
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