Sovereign Wealth and Risk Management: A Framework for Optimal Asset Allocation of Sovereign Wealth

Marie Brière and Zvi Bodie ()
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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

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Abstract: This paper sets out an analytical framework for optimal asset allocation of sovereign wealth, based on the theory of contingent claims analysis applied to the sovereigns economic balance sheet. A country solves an asset-liability management problem involving its sources of income and its expenditures. We derive analytically the optimal asset allocation of sovereign wealth, taking explicit account of all sources of risks affecting the sovereigns balance sheet. The optimal composition of sovereign wealth should involve a performance-seeking portfolio and three hedging demand terms for the variability of the fiscal surplus and external and domestic debt. A real-life application of our model in the case of Chile shows that its sovereign investment is under-diversified.

Keywords: Central Bank Reserves; Sovereign Wealth Funds; Asset-Liability Management; Contingent Claim Analysis; Balance Sheet (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

Published in Journal Of Investment Management, 2014, 12 (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01492603

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