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Spending rules for endowment funds

  • Isabelle Bajeux-Besnainou

    ()

  • Kurtay Ogunc

    ()

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    Endowment fund managers face an asset allocation problem with several particularities: they are more interested in spending for current and future beneficiaries than growing value, although the trade-off between these two alternatives needs to be understood; they have to consider longest-term investment, typically an infinite horizon. We do address these allocation constraints in a dynamic framework where minimum subsistence levels (introducing the idea that a minimum spending amount needs to be made at every time period) are introduced in the objective function. We derive explicit formulas for the optimal spending stream, endowment value, spending rate and portfolio strategy in a simple Black/Scholes type economy. We analyze the effects of parameter changes on asset allocation decisions and provide simulations on bearish, median and bullish paths. Copyright Springer Science + Business Media, LLC 2006

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    File URL: http://hdl.handle.net/10.1007/s11156-006-8544-6
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    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 27 (2006)
    Issue (Month): 1 (August)
    Pages: 93-107

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    Handle: RePEc:kap:rqfnac:v:27:y:2006:i:1:p:93-107
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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    1. Robert C. Merton, 1991. "Optimal Investment Strategies for University Endowment Funds," NBER Working Papers 3820, National Bureau of Economic Research, Inc.
    2. Niko Canner & N. Gregory Mankiw & David N. Weil, 1994. "An Asset Allocation Puzzle," NBER Working Papers 4857, National Bureau of Economic Research, Inc.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    4. Litvack, James M & Malkiel, Burton G & Quandt, Richard E, 1974. "A Plan for the Definition of Endowment Income," American Economic Review, American Economic Association, vol. 64(2), pages 433-37, May.
    5. Isabelle Bajeux-Besnainou & James V. Jordan & Roland Portait, 2001. "An Asset Allocation Puzzle: Comment," American Economic Review, American Economic Association, vol. 91(4), pages 1170-1179, September.
    6. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    7. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
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