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Portfolio allocation for public pension funds

Author

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  • PENNACCHI, GEORGE
  • RASTAD, MAHDI

Abstract

This paper presents a 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 2000–2009 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.

Suggested Citation

  • 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:cup:jpenef:v:10:y:2011:i:02:p:221-245_00
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    1. repec:agr:journl:v:3(616):y:2018:i:3(616):p:49-60 is not listed on IDEAS
    2. repec:eee:hapoch:v1_865 is not listed on IDEAS
    3. Lu, Lina & Pritsker, Matthew & Zlate, Andrei & Anadu, Kenechukwu E. & Bohn, James, 2019. "Reach for Yield by U.S. Public Pension Funds," Supervisory Research and Analysis Working Papers RPA 19-2, Federal Reserve Bank of Boston.
    4. Leonardo Badea & Ion Stancu & Adina-Alexandra Darman-Guzun, 2018. "Optimizing the allocation of private pension funds in Romania (2nd Pillar)," Scientific Papers 0020, Institute of Financial Studies.
    5. Andrew Ang & Bingxu Chen & Suresh Sundaresan, 2013. "Liability Investment with Downside Risk," NBER Working Papers 19030, National Bureau of Economic Research, Inc.
    6. Aglietta, Michel & Brière, Marie & Rigot, Sandra & Signori, Ombretta, 2012. "Rehabilitating the role of active management for pension funds," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2565-2574.
    7. 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.
    8. repec:dau:papers:123456789/13624 is not listed on IDEAS
    9. repec:mth:ijafr8:v:9:y:2019:i:1:p:366-378 is not listed on IDEAS
    10. repec:eee:jimfin:v:84:y:2018:i:c:p:23-41 is not listed on IDEAS
    11. repec:eee:glofin:v:34:y:2017:i:c:p:43-53 is not listed on IDEAS
    12. repec:eee:finmar:v:36:y:2017:i:c:p:17-39 is not listed on IDEAS

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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