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Pension Funds under Investments Constraints: An Assessment of the Opportunity Cost to the Greek Social Security System

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  • Milonas, Nikolaos /T
  • Papachristou, George
  • Roupas, Theodor /A

Abstract

In this paper we study the opportunity loss of the Greek social security system in terms of risk and return, caused by the inflexible investment constraints under which Greek pension funds operated in the period 1958-2000. Using data on pension fund reserves as well as on money and capital market yields, we evaluate retrospectively the risks and returns of a more pro-investment fund reserve management by analyzing an indicative number of investment scenarios in local and international money and capital markets. In order to estimate local currency yields for international investment, we generate for the entire period – covering both a fixed and a partially floating exchange rates regime – a corresponding series of exchange rate variations based on the official rate fluctuations and inflation differentials. Our results suggest that in the 43-year period, there has been a significant opportunity loss in the system both in risk and returns: first, by excluding Greek bank deposits and Greek capital market securities that would have propped returns up at acceptable levels of risk and, second, by not allowing for some degree of international diversification that would have kept overall downside risk down. This opportunity loss could have alleviated, to some extent, the current imbalance of the system, had some of the restrictive investment rules been relaxed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36702.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:36702

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Keywords: pension funds; financial investment;

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  1. Manfred Koch & Christian Thimann, 1999. "From Generosity to Sustainability: The Austrian Pension System and Options for its Reform," Empirica, Springer, Springer, vol. 26(1), pages 21-38, March.
  2. Milonas, Nikolaos T. & Papachristou, George A. & Roupas, Theodore A., 2009. "Fund management and its effect in the Greek social security system," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 8(04), pages 485-500, October.
  3. Christian E. Weller & Jeffrey Wenger, 2008. "Prudent Investors: The Asset Allocation of Public Pension Plans," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp175, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Disney, Richard, 2000. "Crises in Public Pension Programmes in OECD: What Are the Reform Options?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(461), pages F1-23, February.
  5. Christian E. Weller, 2000. "Risky business? Evaluating market risk of equity investment proposals to reform social security," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 263-273.
  6. N. A. Barr, 2000. "Reforming Pensions," IMF Working Papers 00/139, International Monetary Fund.
  7. George Kouretas & Leonidas Zarangas, . "A Cointegration Analysis Of The Official And Parallel Foreign Exchange Markets For Dollars In Greece," Working Papers, University of Crete, Department of Economics 9512, University of Crete, Department of Economics.
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