The optimal spending rate versus the expected real return of a sovereign wealth fund

Knut Aase and Petter Bjerksund

No 2021/1, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund’s expected real rate of return. The optimal spending rate secures that the fund will last ”forever”. Spending the expected return will deplete the fund with probability one. Moreover, this strategy is inconsistent with optimal portfolio choice. Our results are contrary to the idea that it is sustainable to spend the expected return of a sovereign wealth fund.

Keywords: Optimal spending rate; endowment funds; expected utility; risk aversion; EIS; recursive utility (search for similar items in EconPapers)
JEL-codes: D51 D53 D90 E21 G10 G12 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2021-02-04
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Optimal Spending Rate versus the Expected Real Return of a Sovereign Wealth Fund (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhhfms:2021_001

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