Optimal Asset Allocation and Consumption Rules for Commodity-Based Sovereign Wealth Funds
Diaa Noureldin and
Khouzeima Moutanabbir
No 1172, Working Papers from Economic Research Forum
Abstract:
This paper studies the optimal asset allocation for a sovereign wealth fund (SWF) subject to a stochastic stream of commodity-based income, where, without loss of generality, we focus on oil-based SWFs. Using CRRA utility, we assume the fund’s objective is to maximize the discounted utility of intertemporal consumption in the presence of time-varying investment opportunities, and given non-zero correlations between shocks to oil income and asset return innovations. We use the log-linear approximation method of Campbell (1993) to solve for the model’s optimal asset allocation and consumption rules. Using historical data, we estimate the model parameters using the maximization-by-parts algorithm of Song et al. (2005). We then calibrate the model to study the optimal allocation and consumption for varying levels of risk aversion, time preference and oil income volatility. Our results are of interest to SWFs seeking optimal portfolio choice in the face of changing investment opportunities which correlate with their stochastic stream of income.
Pages: 38 pages
Date: 2018-03-25, Revised 2008-03-25
References: View references in EconPapers View complete reference list from CitEc
Citations:
Published by The Economic Research Forum (ERF)
Downloads: (external link)
http://erf.org.eg/wp-content/uploads/2018/03/1172_Final.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://erf.org.eg/wp-content/uploads/2018/03/1172_Final.pdf [301 Moved Permanently]--> https://erf.org.eg/wp-content/uploads/2018/03/1172_Final.pdf)
https://bit.ly/2G9VFV1 (text/html)
Related works:
Journal Article: Optimal asset allocation and consumption rules for commodity-based sovereign wealth funds (2020) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:erg:wpaper:1172
Access Statistics for this paper
More papers in Working Papers from Economic Research Forum Contact information at EDIRC.
Bibliographic data for series maintained by Namees Nabeel ().