The Return Expectations of Public Pension Funds

99 Pages Posted: 6 Nov 2019 Last revised: 2 Oct 2021

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam and CEPR

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2021


The return expectations of public pension funds are positively related to cross-sectional differences in past performance. This positive relation operates through the expected risk premium, rather than the expected risk-free rate or inflation rate. Pension funds act on their beliefs and adjust their portfolio composition accordingly. Persistent investment skills, risk-taking, efforts to reduce costly rebalancing, and fiscal incentives from unfunded liabilities cannot fully explain the reliance of expectations on past performance. The results are consistent with extrapolative expectations, as the dependence on past returns is greater when executives have personally experienced longer performance histories with the fund.

Keywords: Institutional investors, pension funds, return expectations, asset allocation, extrapolation

JEL Classification: G02, G11, G23, G28, H75, D83, D84

Suggested Citation

Andonov, Aleksandar and Rauh, Joshua D., The Return Expectations of Public Pension Funds (September 2021). Stanford University Graduate School of Business Research Paper No. 18-5, 9th Miami Behavioral Finance Conference 2018, Available at SSRN: or

Aleksandar Andonov

University of Amsterdam and CEPR ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV


Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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