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Background Risk and University Endowment Funds

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  • Stephen G. Dimmock

    (Nanyang Technological University)

Abstract

This paper tests the effect of background risk on university endowment portfolios, where background risk is defined as the volatility of universities' nonfinancial income. The results show that higher background risk is associated with lower portfolio standard deviations. Universities with higher background risk invest significantly more in fixed income and less in alternative assets. A 1 standard deviation increase in background risk increases the allocation to fixed income by approximately 15% relative to the mean. There is also evidence that wealthier, highly selective universities hold riskier portfolios. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Stephen G. Dimmock, 2012. "Background Risk and University Endowment Funds," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 789-799, August.
  • Handle: RePEc:tpr:restat:v:94:y:2012:i:3:p:789-799
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    Cited by:

    1. Harvey S. Rosen & Alexander J.W. Sappington, 2016. "To Borrow or Not to Borrow? An Analysis of University Leverage Decisions," Working Papers 249, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Stephen Satchell & Susan Thorp, 2007. "Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments," Research Paper Series 209, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Juliane Proelss & Denis Schweizer, 2014. "Polynomial goal programming and the implicit higher moment preferences of US institutional investors in hedge funds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, pages 1-28.
    4. Jeffrey R. Brown & Stephen G. Dimmock & Scott Weisbenner, 2012. "The Supply of and Demand for Charitable Donations to Higher Education," NBER Chapters,in: How the Financial Crisis and Great Recession Affected Higher Education, pages 151-174 National Bureau of Economic Research, Inc.
    5. Keith C. Brown & Cristian Ioan Tiu, 2013. "The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds," NBER Chapters,in: How the Financial Crisis and Great Recession Affected Higher Education, pages 43-98 National Bureau of Economic Research, Inc.
    6. Rosen, Harvey S. & Sappington, Alexander J.W., 2016. "To borrow or not to borrow? An analysis of university leverage decisions," Research in Economics, Elsevier, pages 170-185.
    7. Caroline M. Hoxby, 2013. "Endowment Management Based on a Positive Model of the University," NBER Chapters,in: How the Financial Crisis and Great Recession Affected Higher Education, pages 15-41 National Bureau of Economic Research, Inc.
    8. Harvey S. Rosen & Alexander J. W. Sappington, 2016. "What Do University Endowment Managers Worry About? An Analysis of Alternative Asset Investments and Background Income," Education Finance and Policy, MIT Press, pages 404-425.
    9. Keith Brown & Cristian Tiu, 2013. "The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds," NBER Working Papers 19517, National Bureau of Economic Research, Inc.
    10. Jeffrey R. Brown & Stephen G. Dimmock & Jun-Koo Kang & Scott J. Weisbenner, 2014. "How University Endowments Respond to Financial Market Shocks: Evidence and Implications," American Economic Review, American Economic Association, pages 931-962.
    11. Stephen Satchell & Susan Thorp & Oliver Williams, 2012. "Estimating Consumption Plans for Recursive Utility by Maximum Entropy Methods," Research Paper Series 300, Quantitative Finance Research Centre, University of Technology, Sydney.
    12. Harvey S. Rosen & Alexander J. W. Sappington, 2016. "To Borrow or Not to Borrow? An Analysis of University Leverage Decisions," NBER Working Papers 21951, National Bureau of Economic Research, Inc.
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    15. Alan S. Blinder, 2015. "What Did We Learn from the Financial Crisis, the Great Recession, and the Pathetic Recovery?," The Journal of Economic Education, Taylor & Francis Journals, pages 135-149.
    16. Yan Lau & Harvey S. Rosen, 2015. "Are Universities Becoming More Unequal?," NBER Working Papers 21432, National Bureau of Economic Research, Inc.
    17. Harvey S. Rosen & Alexander J. W. Sappington, 2016. "Impact of Endowment Shocks on Payouts," Working Papers 250, Princeton University, Department of Economics, Center for Economic Policy Studies..
    18. Yan Lau & Harvey S. Rosen, 2015. "Are Universities Becoming More Unequal?," Working Papers 245, Princeton University, Department of Economics, Center for Economic Policy Studies..
    19. David Yermack, 2015. "Donor Governance and Financial Management in Prominent U.S. Art Museums," NBER Working Papers 21066, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    university endowment funds; background risk; asset allocation; portfolio choice; incomplete markets;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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