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Investment decisions in crises — A study of private pension fund investments

Erzsébet Kovács (), Barbara Dömötör () and Helena Naffa ()

Acta Oeconomica, 2011, vol. 61, issue 4, 389-412

Abstract: Private pension funds were thought to be an important pillar of old-age provision when they were introduced throughout (Emerging) Europe. As different as these funds are in different countries with regards to their regulation, their ownership structure and operation, none were immune to the sub-prime led financial crisis. The Hungarian private pension funds are unique amongst the defined contribution (DC) funds. With their decade old recent history, they are maturing to the payout period in a few years’ time; however, their demise appears ever more realistic by means of political decision. This makes uncovering their investment policy during the crises very timely. Examining such a period is of importance in shedding light on the behaviour of traditional financial concepts in periods of stress. In this paper, we assess the optimality of diversification, hedging and short sales decision possibilities of the Hungarian pension funds in the equity investments environment. Was the net asset value (NAV) erosion suffered by the Hungarian private pension funds a result of their investment decision? We examine this question of diversification through a hypothetical simulation of model investment portfolios. Our results show that international diversification yields better risk-adjusted returns only in case of perfect hindsight of future market movements. The high correlation of the stock indices globally in times of crises limits the benefits of diversification.

Keywords: financial crises; pension funds; portfolio performance; Hungary (search for similar items in EconPapers)
JEL-codes: G01 G23 C38 (search for similar items in EconPapers)
Date: 2011
Note: H. Naffa’s contribution was supported by TÁMOP-4.2.1. B-09/0/KMR-2010-0005 project financed by the European Union and co-financed by the European Social Fund. The authors express their gratitude to two anonymous referees for their invaluable comments that helped augment the level of this paper in both content and structural format. Any possible shortcomings are solely the responsibility of the authors.
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