The Return Expectations of Public Pension Funds

102 Pages Posted: 9 Nov 2021

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam

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: October 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: asset allocation, extrapolation, institutional investors, pension funds, Return Expectations

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

Suggested Citation

Andonov, Aleksandar and Rauh, Joshua D., The Return Expectations of Public Pension Funds (October 2021). CEPR Discussion Paper No. DP16635, Available at SSRN:

Aleksandar Andonov (Contact Author)

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV


Joshua D. Rauh

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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