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International pension swaps

Author

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  • BODIE, ZVI
  • MERTON, ROBERT C.

Abstract

During the past twenty years, swap contracts have become key financial ‘adapters’ linking diverse national financial systems to the global financial network. Today banks and investment companies around the world use swaps extensively to manage their currency, interest-rate, and equity-market risks and to lower their transaction costs. Yet pension funds, which have grown rapidly over that same 20-year period, hardly use swaps at all. This paper suggests how pension funds could use swaps to achieve the risk-sharing benefits of broad international diversification and hedging while avoiding the ‘flight’ of scarce domestic capital to other countries. The paper also shows how swaps can be used to lower the risks of expropriation and to lower the other transaction costs of investing in other countries.

Suggested Citation

  • Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(1), pages 77-83, March.
  • Handle: RePEc:cup:jpenef:v:1:y:2002:i:01:p:77-83_00
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    Cited by:

    1. Nicolas R Blancher & François Haas & John Kiff & Oksana Khadarina & Paul S. Mills & Parmeshwar Ramlogan & William Lee & Yoon Sook Kim & Todd Groome & Shinobu Nakagawa, 2006. "The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks," IMF Working Papers 06/217, International Monetary Fund.
    2. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    3. Dirk Broeders & Roel Mehlkopf & Annick van Ool, 2018. "The economics of sharing macro-longevity risk," DNB Working Papers 618, Netherlands Central Bank, Research Department.
    4. Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.
    5. de Menil, Georges, 2005. "Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question)," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 123-141, January.
    6. Jorge A Chan-Lau, 2004. "Pension Funds and Emerging Markets," IMF Working Papers 04/181, International Monetary Fund.
    7. Claessens, Stijn, 2005. "Taking stock of risk management techniques for sovereigns," Policy Research Working Paper Series 3570, The World Bank.
    8. Wade D. Pfau, 2008. "Emerging Market Pension Funds and International Diversification," GRIPS Discussion Papers 08-10, National Graduate Institute for Policy Studies.
    9. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2006. "A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy," NBER Working Papers 12637, National Bureau of Economic Research, Inc.
    10. Ladekarl, Jeppe & Ladekarl, Regitze & Andersen, Erik Brink & Vittas, Dimitri, 2007. "The use of derivatives to hedge embedded options : the case of pension institutions in Denmark," Policy Research Working Paper Series 4159, The World Bank.
    11. Stephen Matteo Miller, 2012. "Booms and Busts as Exchange Options," Multinational Finance Journal, Multinational Finance Journal, vol. 16(3-4), pages 189-223, September.
    12. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    13. Palacios, Robert, 2002. "Managing public pension reserves Part II : lessons from five recent OECD initiatives," Social Protection Discussion Papers and Notes 33407, The World Bank.
    14. Ajantha Kumara & Wade Pfau, 2013. "Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants," Annals of Finance, Springer, vol. 9(3), pages 319-335, August.
    15. W Pfau, 2009. "The Role of International Diversification in Public Pension Systems: The Case of Pakistan," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 81-106, September.
    16. Carlo Ambrogio Favero & Francesco Giavazzi, "undated". "Why are Brazil´s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    17. Robert C. Merton & Zvi Bodie, 2005. "Design Of Financial Systems: Towards A Synthesis Of Function And Structure," World Scientific Book Chapters, in: H Gifford Fong (ed.), The World Of Risk Management, chapter 1, pages 1-27, World Scientific Publishing Co. Pte. Ltd..
    18. repec:bla:ecinqu:v:56:y:2018:i:2:p:682-685 is not listed on IDEAS
    19. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank.
    20. Dimitri Vittas, 2003. "The use of"asset swaps"by institutional investors in South Africa," Policy Research Working Paper Series 3175, The World Bank.

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