Sovereign Wealth and Risk Management: A Framework for Optimal Asset Allocation of Sovereign Wealth

Journal Of Investment Management (JOIM), First Quarter 2014

Posted: 6 Mar 2015

See all articles by Zvi Bodie

Zvi Bodie

Boston University - Department of Finance & Economics

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Multiple version iconThere are 2 versions of this paper

Date Written: May 22, 2014

Abstract

This paper sets out an analytical framework for optimal asset allocation of sovereign wealth, based on the theory of contingent claims analysis applied to the sovereigns economic balance sheet. A country solves an asset-liability management problem involving its sources of income and its expenditures. We derive analytically the optimal asset allocation of sovereign wealth, taking explicit account of all sources of risks affecting the sovereigns balance sheet. The optimal composition of sovereign wealth should involve a performance-seeking portfolio and three hedging demand terms for the variability of the fiscal surplus and external and domestic debt. A real-life application of our model in the case of Chile shows that its sovereign investment is under-diversified.

Keywords: Asset-liability management, balance sheet, contingent claim analysis, sovereign wealth funds, central bank reserves

JEL Classification: G00

Suggested Citation

Bodie, Zvi and Briere, Marie, Sovereign Wealth and Risk Management: A Framework for Optimal Asset Allocation of Sovereign Wealth (May 22, 2014). Journal Of Investment Management (JOIM), First Quarter 2014. Available at SSRN: https://ssrn.com/abstract=2440938

Zvi Bodie (Contact Author)

Boston University - Department of Finance & Economics ( email )

United States

HOME PAGE: http://www.zvibodie.com

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

Université Libre de Bruxelles ( email )

Brussels
Belgium

Register to save articles to
your library

Register

Paper statistics

Abstract Views
409
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information