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Optimal Asset Allocation for Commodity Sovereign Wealth Funds

Author

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  • Irarrazabal, Alfonso A.

    (BI Norwegian Business School)

  • Ma, Lin

    (School of Economics and Business, Norwegian University of Life Sciences)

Abstract

This paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund under incomplete markets. We calibrate the model using data from three countries: Norway, UAE and Chile. In our benchmark calibration for Norway, we find that the fund’s manager should initially invest all her wealth to stock and reduce this fraction gradually over time. We find that the solution is particularly sensitive to the assumption about the volatility of commodity prices. The solution for Chile implies that for relatively high risk aversion coefficients the manager should start at a small fraction of her wealth to increase later over the life cycle of the fund.

Suggested Citation

  • Irarrazabal, Alfonso A. & Ma, Lin, 2018. "Optimal Asset Allocation for Commodity Sovereign Wealth Funds," Working Paper Series 11-2018, Norwegian University of Life Sciences, School of Economics and Business.
    • Handle: RePEc:hhs:nlsseb:2018_011
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic asset allocation; portfolio management; sovereign wealth fund; income risk;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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