Emerging Market Pension Funds and International Diversification
AbstractMany countries are currently increasing the advanced funding of their public pension systems to improve their sustainability in the face of rapidly aging populations. When pensions are funded, the issue of asset allocation becomes of paramount importance. Standard portfolio selection theory provides a fundamental justification for international diversification: by widening the pool of potential assets, investors can potentially increase returns while possibly even reducing risks through the selection of complementary assets with low correlations. Nonetheless, many emerging market countries have regulations that strictly limit the choice of investments for pension funds, in some cases excluding international assets entirely. This paper uses modern portfolio theory to determine the optimal asset allocation for public pension systems in emerging market countries. We find that on average, about half of the portfolios of emerging market countries should be in world assets. The paper then quantifies the costs of prohibiting international diversification.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 19039.
Date of creation: Jun 2009
Date of revision:
emerging markets; asset allocation; pensions; defined-contribution;
Other versions of this item:
- Wade D. Pfau, 2008. "Emerging Market Pension Funds and International Diversification," GRIPS Discussion Papers 08-10, National Graduate Institute for Policy Studies.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
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