Pension Fund's Illiquid Assets Allocation Under Liquidity and Capital Constraints

47 Pages Posted: 19 Apr 2017

See all articles by Dirk Broeders

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Kristy A.E. Jansen

Tilburg University; De Nederlandsche Bank - Research Department

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: April 19, 2017

Abstract

This paper empirically assesses the impact of liquidity and capital constraints on the allocation of defined benefit pension funds to illiquid assets. Liquidity constraints result from short-term pension payments and collateral requirements on derivatives. Capital constraints follow from the requirement to retain sufficient capital to absorb unexpected losses. Liability duration and hedging affect the allocation to illiquid assets through both these constraints. First, we find a hump-shaped impact of liability duration on the illiquid assets allocation. Up to 17.5 years, liability duration positively affects the illiquid asset allocation. However, beyond this point the effect is reversed as the capital constraint dominates the liquidity constraint. Second, we find no evidence that interest rate hedging affects the illiquid assets allocation. Third, we do find that currency risk hedging positively impacts the illiquid assets allocation.

Keywords: Illiquid assets, asset liability management, asset allocation, liquidity constraints, capital constraints, pension funds, regulation

JEL Classification: G11, G23

Suggested Citation

Broeders, Dirk and Jansen, Kristy A.E. and Werker, Bas J.M., Pension Fund's Illiquid Assets Allocation Under Liquidity and Capital Constraints (April 19, 2017). De Nederlandsche Bank Working Paper No. 555. Available at SSRN: https://ssrn.com/abstract=2955159 or http://dx.doi.org/10.2139/ssrn.2955159

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/onderzoek-2/onderzoekers/overzicht-persoonlijke-paginas/dnb257487.jsp

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

HOME PAGE: http://https://www.maastrichtuniversity.nl/about-um/faculties/school-business-and-economics

Kristy A.E. Jansen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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