Pension fund's illiquid assets allocation under liquidity and capital requirements
Broeders,Dirk W. G. A. Jansen,Kristy A. E. Werker,Bas J.M.
Broeders,Dirk W. G. A.
Jansen,Kristy A. E.
Werker,Bas J.M.
Abstract
Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.
Description
Date
2021-01
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Volume Title
Publisher
Research Projects
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Keywords
Asset allocation, asset liability management, capital requirements, illiquid assets, liquidity requirements, pension funds, INVESTMENT POLICY, RISK-MANAGEMENT, PERFORMANCE, LIABILITIES, SCALE, G11 - Portfolio Choice ; Investment Decisions, G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors
Citation
Broeders, D W G A, Jansen, K A E & Werker, B J M 2021, 'Pension fund's illiquid assets allocation under liquidity and capital requirements', Journal of Pension Economics & Finance, vol. 20, no. 1, pp. 102-124. https://doi.org/10.1017/S1474747219000398