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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Helmut Reisen, 1997.
"Liberalising Foreign Investments by Pension Funds: Positive and Normative Aspects,"
OECD Development Centre Working Papers
120, OECD Publishing.
- Reisen, Helmut, 1997. "Liberalizing foreign investments by pension funds: Positive and normative aspects," World Development, Elsevier, vol. 25(7), pages 1173-1182, July.
- 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.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Blake, David, 2000. "Does It Matter What Type of Pension Scheme You Have?," Economic Journal, Royal Economic Society, vol. 110(461), pages F46-81, February.
- Davis, E. Philip, 2002. "Prudent person rules or quantitative restrictions? The regulation of long-term institutional investors' portfolios," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(02), pages 157-191, July.
- Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 77-83, March.
- Gary Burtless, 2007. "International Investment for Retirement Savers: Historical Evidence on Risk and Returns," Working Papers, Center for Retirement Research at Boston College wp2007-05, Center for Retirement Research, revised Feb 2007.
- World Bank, 2007. "World Development Indicators 2007," World Bank Publications, The World Bank, number 8150.
- Jorge A. Chan-Lau, 2004. "Pension Funds and Emerging Markets," IMF Working Papers 04/181, International Monetary Fund.
- Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.
- Kumara, Ajantha Sisira & Pfau, Wade Donald, 2011. "Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants," MPRA Paper 31395, University Library of Munich, Germany, revised 10 Jun 2011.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.