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Optimal Asset Allocation for Commodity Sovereign Wealth Funds

Alfonso A. Irarrazabal (), Lin Ma () and Juan Parra-Alvarez ()
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Alfonso A. Irarrazabal: BI Norwegian Business School, Postal: Department of Economics, BI Norwegian Business School, Nydalsveien 37, N-0484 Oslo, Norway
Lin Ma: CICERO, Center for International Climate Research, Postal: Gaustadalléen 21, 0349 Oslo, Norway

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper studies the dynamic asset allocation problem faced by an infinitively-lived commodity-based sovereign wealth fund under incomplete markets. Since the non-tradable stream of commodity revenues is finite, the optimal consumption and investment strategies are time dependent. Using data from the Norwegian Petroleum Fund, we find that the optimal demand for equity should decrease gradually from 60 to 40 percent over the next 60 years. However, the solution is particularly sensitive to the correlation between oil and stock price changes. We also estimate wealth-equivalent welfare losses, relative to the optimal rule, when following alternative suboptimal investment rules.

Keywords: Optimal asset allocation; sovereign wealth fund; commodities; income risk; suboptimal investments (search for similar items in EconPapers)
JEL-codes: E21 G11 G23 Q32 (search for similar items in EconPapers)
Pages: 47
Date: 2020-09-03
New Economics Papers: this item is included in nep-mac
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