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Investor sophistication and risk taking

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  • de Dreu, Jan
  • Bikker, Jacob A.

Abstract

Using investment policy data of 857 Dutch pension funds during 1999–2006, we develop three indicators of investor sophistication. The indicators show that pension funds’ strategic portfolio choices are often based on coarse and less sophisticated approaches. First, most pension funds round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative, more complex asset classes, resulting in limited asset diversification. Third, many pension funds favor regional investments and as such do not fully employ the opportunities of international risk diversification. Our indicators are correlated with pension fund size, in line with the expectation that smaller pension funds are generally less sophisticated than large pension funds. Using the indicators for investor sophistication, we show that less sophisticated pension funds tend to opt for investment strategies with less risk.

Suggested Citation

  • de Dreu, Jan & Bikker, Jacob A., 2012. "Investor sophistication and risk taking," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2145-2156.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2145-2156
    DOI: 10.1016/j.jbankfin.2012.03.023
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    References listed on IDEAS

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    Cited by:

    1. Martijn Boermans & Robert Vermeulen, 2016. "International investment positions revisited: Investor heterogeneity and individual security characteristics," DNB Working Papers 531, Netherlands Central Bank, Research Department.
    2. repec:cup:jfinqa:v:52:y:2017:i:02:p:737-750_00 is not listed on IDEAS
    3. Antoniou, Constantinos & Harrison, Glenn W. & Lau, Morten I. & Read, Daniel, 2017. "Information Characteristics and Errors in Expectations: Experimental Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(02), pages 737-750, April.
    4. Whitaker, Stephan, 2014. "Financial Innovations and Issuer Sophistication in Municipal Securities Markets," Working Paper 1404, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Pension funds; Investment policy; Portfolio choice; Behavioural finance; Heaping; Diversification; Home bias;

    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

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