Asset Class Diversification and Delegation of Responsibilities between Central Banks and Sovereign Wealth Funds

28 Pages Posted: 27 Sep 2010 Last revised: 17 Oct 2010

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

Date Written: September 2010

Abstract

This paper presents a model comparing the degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and SWF are affected by the government's delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.

Suggested Citation

Aizenman, Joshua and Glick, Reuven, Asset Class Diversification and Delegation of Responsibilities between Central Banks and Sovereign Wealth Funds (September 2010). NBER Working Paper No. w16392. Available at SSRN: https://ssrn.com/abstract=1683162

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

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