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Why don’t Latvian pension funds diversify more internationally?


  • Swinkels, L.A.P.
  • Vejina, D.
  • Vilans, R.


Latvian employees have to choose a pension fund for the second-pillar of the Latvian pension system. These pension funds invest about 85% in domestic assets. In this paper, we address the question why this strong home bias might exist. Firstly, we conclude that the Latvian pension law is strict on international diversification. However, not to the extent that it can fully explain the home bias. Secondly, our empirical analysis suggests that international diversification lowers investment risks for Latvian (pension) investors. Thus, it seems hard to explain the home bias of Latvian pension funds by lack of diversification benefits. Thirdly, Latvian pension fund managers might have more (private) information about Latvian companies than international companies. Therefore, they might prefer to invest more domestically to add more value for their clients. Finally, Latvian employees might have a strong preference to invest in companies they are familiar with. Since we are not aware of any research on the latter two topics, we can only speculate that currently many investment policies are suboptimal for Latvian employees saving for retirement. We expect the Latvian pension industry to develop new products that reduce risk by allowing for more diversification. In addition, we recommend Latvian employees to pay attention to the investment policy of their pension fund and think carefully about the rewards, risks, and costs that are involved.

Suggested Citation

  • Swinkels, L.A.P. & Vejina, D. & Vilans, R., 2005. "Why don’t Latvian pension funds diversify more internationally?," ERIM Report Series Research in Management ERS-2005-078-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:7132

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    References listed on IDEAS

    1. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
    2. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-680.
    3. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    4. Zoran Ivkovic & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, February.
    5. Gilmore, Claire G. & McManus, Ginette M., 2002. "International portfolio diversification: US and Central European equity markets," Emerging Markets Review, Elsevier, vol. 3(1), pages 69-83, March.
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    Cited by:

    1. Raimonds Lieksnis, 2010. "Evaluating the Financial Performance of Latvian and Estonian Second-Pillar Pension Funds," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 2(2).

    More about this item


    Emerging Markets; Home Bias; International Investing; Pension Funds;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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