Does Regulation Matter? Riskiness and Procyclicality of Pension Asset Allocation

Ling-Ni Boon, Marie Brière and Sandra Rigot
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Ling-Ni Boon: Tilburg University [Netherlands]
Marie Brière: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Sandra Rigot: CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we investigate the relative importance of drivers to pension funds' asset allocation choices. We specifically test if the contrast between regulatory approaches of public and private Defined Benefits (DB) pension funds in the US, Canada and the Netherlands have an impact on the riskiness and procyclicality of their asset allocation. Derived from panel data analysis of a unique database comprising of more than 800 pension funds' detailed asset allocations, our results underscore the economic importance of regulation in the funds' asset allocation choices, relative to institutional and individual funds' characteristics. In particular, quantitative risk-based capital requirements, and to a lesser extent valuation and funding requirements (i.e., the choice of the liability discount rate) or the presence of quantitative investment restrictions, induce pension funds to significantly decrease their asset allocation to risky assets, especially to equities. Allocation to alternatives, which are comparatively treated quite favorably by solvency standards, is higher in the presence of risk-based capital requirements. Contrary to popular conviction that regulatory mechanisms encourage procyclical asset allocation, we find that funds subject to risk-based capital requirements were likely to be less procyclical during the last crisis – an outcome possibly tempered by temporary regulatory slackening in response to the crisis.

Keywords: Solvency; Pension funds; Financial stability; Regulation (search for similar items in EconPapers)
Date: 2014-05
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Citations: View citations in EconPapers (4)

Published in 31st International French Finance Association Conference, AFFI 2014, May 2014, Aix-en-Provence, France. pp.42, ⟨10.2139/ssrn.2542577⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01492547

DOI: 10.2139/ssrn.2542577

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