Pension Fund's Illiquid Assets Allocation Under Liquidity and Capital Requirements
44 Pages Posted: 19 Apr 2017 Last revised: 23 Feb 2020
Date Written: April 19, 2017
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: Suggested Citation