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Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance

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  • Joshua Aizenman
  • Reuven Glick

Abstract

This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by effective governance, but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country's transparency may affect the size of the foreign asset base entrusted to a wealth fund's management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be advantageous. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14562.

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Date of creation: Dec 2008
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Publication status: published as Joshua Aizenman & Reuven Glick, 2009. "Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance," International Finance, Blackwell Publishing, vol. 12(3), pages 351-386, December.
Handle: RePEc:nbr:nberwo:14562

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  1. Kotter, Jason & Lel, Ugur, 2011. "Friends or foes? Target selection decisions of sovereign wealth funds and their consequences," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(2), pages 360-381, August.
  2. Joshua Aizenman & Jaewoo Lee, 2005. "International reserves: precautionary versus mercantilist views, theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  3. Joshua Aizenman & Reuven Glick, 2005. "Pegged exchange rate regimes -- a trap?," Working Paper Series, Federal Reserve Bank of San Francisco 2006-07, Federal Reserve Bank of San Francisco.
  4. Joshua Aizenman, 2007. "Large Hoarding of International Reserves and the Emerging Global Economic Architecture," NBER Working Papers, National Bureau of Economic Research, Inc 13277, National Bureau of Economic Research, Inc.
  5. Edwin M. Truman, 2009. "A Blueprint for Sovereign Wealth Fund Best Practices," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 9(1), pages 429-451.
  6. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers, National Bureau of Economic Research, Inc 5285, National Bureau of Economic Research, Inc.
  7. Edwin M. Truman, 2007. "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability," Policy Briefs, Peterson Institute for International Economics PB07-6, Peterson Institute for International Economics.
  8. Yin-Wong Cheung & Hiro Ito, 2009. "A Cross-Country Empirical Analysis of International Reserves," CESifo Working Paper Series, CESifo Group Munich 2654, CESifo Group Munich.
  9. Benjamin E. Hermalin & Michael S. Weisbach, 2007. "Transparency and Corporate Governance," NBER Working Papers, National Bureau of Economic Research, Inc 12875, National Bureau of Economic Research, Inc.
  10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  11. Joshua Aizenman & Reuven Glick, 2007. "Sovereign wealth funds: stumbling blocks or stepping stones to financial globalization?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue dec14.
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Cited by:
  1. Orihuela, José Carlos, 2013. "How do “Mineral-States” Learn? Path-Dependence, Networks, and Policy Change in the Development of Economic Institutions," World Development, Elsevier, Elsevier, vol. 43(C), pages 138-148.
  2. Aizenman, Joshua, 2009. "On the paradox of prudential regulations in the globalized economy; International reserves and the crisis: a reassessment," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt5hx2x2kj, Department of Economics, UC Santa Cruz.
  3. Thomas Grenes & Mehmet Caner, 2009. "Le fonds souverain norvégien," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 9(1), pages 125-131.
  4. Aizenman, Joshua & Inoue, Kenta, 2012. "Central Banks and Gold Puzzles," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt7bx7h0q4, Department of Economics, UC Santa Cruz.
  5. David Kemme, 2012. "Soverign Wealth Fund Issues and the National Fund(s) of Kazakhstan," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp1036, William Davidson Institute at the University of Michigan.
  6. Joshua Aizenman & Reuven Glick, 2010. "Asset Class Diversification and Delegation of Responsibilities between Central Banks and Sovereign Wealth Funds," NBER Working Papers, National Bureau of Economic Research, Inc 16392, National Bureau of Economic Research, Inc.
  7. Yann Marin, 2009. "Chinese Sovereign Wealth Funds: Past, Present and Future," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 9(1), pages 105-114.
  8. Yann Marin, 2009. "Fonds souverains chinois : état des lieux," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 9(1), pages 109-119.
  9. Thomas Grennes & Mehmet Caner, 2009. "Performance and Transparency of the Norwegian Sovereign Wealth Fund," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 9(1), pages 119-125.
  10. Naotaka Sugawara, 2014. "From Volatility to Stability in Expenditure: Stabilization Funds in Resource-Rich Countries," IMF Working Papers, International Monetary Fund 14/43, International Monetary Fund.

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