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Portfolio Allocation for Public Pension Funds

Author

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  • George Pennacchi
  • Mahdi Rastad

Abstract

This paper presents a dynamic model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000 to 2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset - liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

Suggested Citation

  • George Pennacchi & Mahdi Rastad, 2010. "Portfolio Allocation for Public Pension Funds," NBER Working Papers 16456, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16456
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    Cited by:

    1. repec:eee:hapoch:v1_865 is not listed on IDEAS
    2. Aglietta, Michel & Brière, Marie & Rigot, Sandra & Signori, Ombretta, 2012. "Rehabilitating the role of active management for pension funds," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2565-2574.
    3. Andrew Ang & Bingxu Chen & Suresh Sundaresan, 2013. "Liability Investment with Downside Risk," NBER Working Papers 19030, National Bureau of Economic Research, Inc.
    4. repec:eee:finmar:v:36:y:2017:i:c:p:17-39 is not listed on IDEAS
    5. repec:dau:papers:123456789/13624 is not listed on IDEAS
    6. repec:eee:glofin:v:34:y:2017:i:c:p:43-53 is not listed on IDEAS
    7. Robert Novy-Marx & Joshua D. Rauh, 2012. "The Revenue Demands of Public Employee Pension Promises," NBER Working Papers 18489, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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

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