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Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance

  • Joshua Aizenman
  • Reuven Glick

This paper presents statistical analysis supporting stylized facts about sovereign wealth funds (SWFs). It discusses the forces leading to the growth of SWFs, including the role of fuel exports and ongoing current account surpluses, and large hoarding of international reserves. It analyzes the degree to which measures of SWF governance and transparency compare with national norms of behavior. We provide evidence that many countries with SWFs are characterized by effective governance, but weak democratic institutions, as compared to other nonindustrial countries. We also present a model with which we compare the optimal degree of diversification abroad by a central bank versus that of a sovereign wealth fund. We show that if the central bank manages its foreign assets with the objective of reducing the probability of sudden stops, it will place a high weight on the downside risk of holding risky assets abroad and will tend to hold primarily safe foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We discuss how the degree of a country's transparency may affect the size of the foreign asset base entrusted to a wealth fund's management, and show that, for relatively low levels of public foreign assets, assigning portfolio management independence to the central bank may be advantageous. However, for a large enough foreign asset base, the opportunity cost associated with the limited portfolio diversification of the central bank induces authorities to establish a wealth fund in pursuit of higher returns.

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File URL: http://www.nber.org/papers/w14562.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14562.

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Date of creation: Dec 2008
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Publication status: published as Joshua Aizenman & Reuven Glick, 2009. "Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance," International Finance, Blackwell Publishing, vol. 12(3), pages 351-386, December.
Handle: RePEc:nbr:nberwo:14562
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  1. Joshua Aizenman & Reuven Glick, 2008. "Pegged Exchange Rate Regimes-A Trap?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 817-835, 06.
  2. Jason Kotter & Ugur Lel, 2008. "Friends or foes? The stock price impact of sovereign wealth fund investments and the price of keeping secrets," International Finance Discussion Papers 940, Board of Governors of the Federal Reserve System (U.S.).
  3. Joshua Aizenman, 2007. "Large Hoarding of International Reserves and the Emerging Global Economic Architecture," NBER Working Papers 13277, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  5. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt2tn4w8x6, Department of Economics, UC Santa Cruz.
  6. Edwin M. Truman, 2009. "A Blueprint for Sovereign Wealth Fund Best Practices," Revue d'Économie Financière, Programme National Persée, vol. 9(1), pages 429-451.
  7. Benjamin E. Hermalin & Michael S. Weisbach, 2007. "Transparency and Corporate Governance," NBER Working Papers 12875, National Bureau of Economic Research, Inc.
  8. Yin-Wong Cheung & Hiro Ito, 2009. "A Cross-Country Empirical Analysis of International Reserves," International Economic Journal, Taylor & Francis Journals, vol. 23(4), pages 447-481.
  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  10. Joshua Aizenman & Reuven Glick, 2007. "Sovereign wealth funds: stumbling blocks or stepping stones to financial globalization?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec14.
  11. Edwin M. Truman, 2007. "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability," Policy Briefs PB07-6, Peterson Institute for International Economics.
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