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Portfolio Allocation for Public Pension Funds

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  • George Pennacchi
  • Mahdi Rastad

Abstract

This paper presents a dynamic model of a public pension fund’s choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model’s implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000 to 2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset – liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16456.

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Date of creation: Oct 2010
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Publication status: published as Pennacchi, George & Rastad, Mahdi, 2011. "Portfolio allocation for public pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(02), pages 221-245, April.
Handle: RePEc:nbr:nberwo:16456

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Cited by:
  1. Michel Aglietta & Marie Briere & Sandra Rigot & Ombretta Signori, 2012. "Rehabilitating the Role of Active Management for Pension Funds," Working Papers CEB, ULB -- Universite Libre de Bruxelles 12-018, ULB -- Universite Libre de Bruxelles.
  2. Brière, Marie & Boon, Ling-Ni & Rigot, Sandra, 2014. "Does Regulation Matter? Riskiness and Procyclicality of Pension Asset Allocation," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/13624, Paris Dauphine University.
  3. Robert Novy-Marx & Joshua D. Rauh, 2012. "The Revenue Demands of Public Employee Pension Promises," NBER Working Papers 18489, National Bureau of Economic Research, Inc.
  4. Andrew Ang & Bingxu Chen & Suresh Sundaresan, 2013. "Liability Investment with Downside Risk," NBER Working Papers 19030, National Bureau of Economic Research, Inc.

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