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Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants

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  • Ajantha Kumara

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  • Wade Pfau

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Abstract

In recent years, investment portfolio selection is growing in importance for many emerging market pension funds, as pension reforms replace traditional pay-as-you-go systems with advanced funding systems. Various investment regulations are applied to the funded pensions, particularly in the form of portfolio limits for equities and international assets. With a bootstrap simulation approach, this paper attempts to quantify the impacts on retirement benefits of restricting international assets from the investment portfolios of emerging market pension funds. We find that, on average, over half of the pension portfolios of emerging market countries should be in international assets in order to maximize the expected utility of moderate and conservative pension fund participants. More generally, international assets can play a significant role in the investment portfolios for workers with risk aversion varying from aggressive to conservative. With few exceptions, the entire probability distribution of wealth accumulations at retirement could be shifted higher with the inclusion of international assets. Copyright Springer-Verlag 2013

Suggested Citation

  • 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.
  • Handle: RePEc:kap:annfin:v:9:y:2013:i:3:p:319-335 DOI: 10.1007/s10436-011-0187-5
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    References listed on IDEAS

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    1. David Robalino, 2005. "Pensions in the Middle East and North Africa: Time for Change," World Bank Publications, The World Bank, number 7427.
    2. Davis, E. Philip, 2002. "Prudent person rules or quantitative restrictions? The regulation of long-term institutional investors' portfolios," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(02), pages 157-191, July.
    3. Elizabeth Asiedu & Yi Jin & Anne Villamil, 2006. "Do lack of transparency and enforcement undermine international risk-sharing?," Annals of Finance, Springer, vol. 2(2), pages 123-140, March.
    4. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 77-83, March.
    5. Wade D. Pfau, 2008. "Emerging Market Pension Funds and International Diversification," GRIPS Discussion Papers 08-10, National Graduate Institute for Policy Studies.
    6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    7. Channarith Meng & Wade Donald Pfau, 2010. "The Role of Pension Funds in Capital Market Development," GRIPS Discussion Papers 10-17, National Graduate Institute for Policy Studies.
    8. Jorge Roldos, 2004. "Pension Reform, Investment Restrictions and Capital Markets," IMF Policy Discussion Papers 04/4, International Monetary Fund.
    9. Jakša Cvitanić & Vassilis Polimenis & Fernando Zapatero, 2008. "Optimal portfolio allocation with higher moments," Annals of Finance, Springer, vol. 4(1), pages 1-28, January.
    10. Jorge A Chan-Lau, 2004. "Pension Funds and Emerging Markets," IMF Working Papers 04/181, International Monetary Fund.
    11. AfDB AfDB, . "AfDB Group Annual Report 2008," Annual Report, African Development Bank, number 64 edited by Koua Louis Kouakou.
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    Cited by:

    1. Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.

    More about this item

    Keywords

    Emerging market pension funds; International diversification; Bootstrapping; Monte Carlo simulations; H55; G11; G23;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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