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Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question)

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  • de Menil, Georges

Abstract

Should the portfolios of mandatory, private pension funds in developing countries be invested exclusively in the home country? Or should their managers be free to make prudent investments anywhere in the world? Traditional portfolio analysis gives a clear answer from the point of view of the beneficiaries of the funds: Lifting geographic restraints expands the risk-reward frontier, and unequivocally enhances their welfare. However, if the balance of payments is constrained, capital outflows must be offset by compensating inflows. We assume that, when pension funds purchase foreign securities, the State is constrained to borrow an equal amount on international markets. We then use a simple model to analyze the resulting trade-offs. Chile, Argentina, Poland and Kazakhstan provide concrete examples of some of the issues discussed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 29 (2005)
Issue (Month): 1 (January)
Pages: 123-141

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Handle: RePEc:eee:jbfina:v:29:y:2005:i:1:p:123-141

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Web page: http://www.elsevier.com/locate/jbf

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  1. von Gersdorff, Hermann, 1997. "Pension reform in Bolivia : innovative solutions to common problems," Policy Research Working Paper Series 1832, The World Bank.
  2. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  3. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
  4. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2003. "The impact of contractual savings institutions on securities markets," Policy Research Working Paper Series 2948, The World Bank.
  5. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  6. Impavido, Gregorio & Musalem, Alberto R. & Vittas, Dimitri, 2002. "Contractual savings in countries with a small financial sector," Policy Research Working Paper Series 2841, The World Bank.
  7. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
  8. Helmut Reisen, 1997. "Liberalising Foreign Investments by Pension Funds: Positive and Normative Aspects," OECD Development Centre Working Papers 120, OECD Publishing.
  9. Afanasiev, S.A., 2003. "Pension Reform in Russia: First Year of Implementing," Discussion Paper 146, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  10. Impavido, Gregorio & Musalem, Alberto R., 2000. "Contractual savings, stock, and asset markets," Policy Research Working Paper Series 2490, The World Bank.
  11. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
  12. Rocha, Roberto & Vittas, Dimitri, 2001. "Pension reform in Hungary : a preliminary assessment," Policy Research Working Paper Series 2631, The World Bank.
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