Estimating the Gains from International Diversification: The Case of Pension Funds

Juan Pablo Afanador, Richard Mark Davis and Alvaro Enrique Pedraza Morales

No 9635, Policy Research Working Paper Series from The World Bank

Abstract: For pension funds, international assets represent an opportunity to improve their returns while possibly reducing risks. Nonetheless, pension funds in many developing countries face regulations that limit the choice of international investments. This paper proposes a new methodology to estimate the gains from international diversification in which the optimal asset allocation of pension funds is constrained by financial frictions. The empirical strategy is applied to the aggregate holdings of pension funds in a large group of countries to calculate the gains from increasing the current level of exposure to international securities. The methodology should give policy makers the opportunity to identify jurisdictions where pension funds could benefit the most from expanding their foreign holdings.

Keywords: Social Funds and Pensions; Capital Markets and Capital Flows; Capital Flows; Non Bank Financial Institutions; International Trade and Trade Rules; Financial Sector Policy; Adolescent Health (search for similar items in EconPapers)
Date: 2021-04-20
New Economics Papers: this item is included in nep-age and nep-int
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