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

44 Pages Posted: 19 Apr 2017 Last revised: 24 Nov 2019

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

Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.

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 Requirements (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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