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Estimating the Gains from International Diversification : The Case of Pension Funds

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  • Afanador,Juan Pablo
  • Davis,Richard Mark
  • Pedraza Morales,Alvaro Enrique

Abstract

For pension funds, international assets represent an opportunity to improve their returns while possibly reducing risks. Nonetheless, pension funds in many developing countries face regulations that limit the choice of international investments. This paper proposes a new methodology to estimate the gains from international diversification in which the optimal asset allocation of pension funds is constrained by financial frictions. The empirical strategy is applied to the aggregate holdings of pension funds in a large group of countries to calculate the gains from increasing the current level of exposure to international securities. The methodology should give policy makers the opportunity to identify jurisdictions where pension funds could benefit the most from expanding their foreign holdings.

Suggested Citation

  • Afanador,Juan Pablo & Davis,Richard Mark & Pedraza Morales,Alvaro Enrique, 2021. "Estimating the Gains from International Diversification : The Case of Pension Funds," Policy Research Working Paper Series 9635, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9635
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    References listed on IDEAS

    as
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    8. Pedraza, Alvaro & Pulga, Fredy & Vasquez, Jose, 2020. "Costly index investing in foreign markets," Journal of Financial Markets, Elsevier, vol. 51(C).
    Full references (including those not matched with items on IDEAS)

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