Defined Benefit Pension Plan Liabilities and International Asset Allocation

Tongxuan Yang
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Tongxuan Yang: University of Pennsylvania

Working Papers from University of Michigan, Michigan Retirement Research Center

Abstract: Despite the integration of international capital markets and the relaxation of capital controls, U.S. defined benefit pension plans do not sufficiently diversify their assets across international holdings. In this paper, we explore whether incorporating liabilities in the asset allocation decision can help explain pension plans’ home bias. We find that incorporating pension liabilities proves not to explain pension plan home bias in the case when returns are nominal. Furthermore, when we focus on real returns, incorporating pension plan liabilities makes the home bias puzzle worse. The fact remains that U.S. defined benefit pension plans could benefit substantially from more international investment.

Pages: 30 pages
Date: 2003-10
New Economics Papers: this item is included in nep-fin
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