Portfolio Allocation for Public Pension Funds

George Pennacchi and Mahdi Rastad

No 16456, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a dynamic model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000 to 2009 period. Consistent with agency behavior by public pension fund management, we find evidence that funds chose greater overall asset - liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.

JEL-codes: G11 G23 G28 (search for similar items in EconPapers)
Date: 2010-10
Note: PE
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Pennacchi, George & Rastad, Mahdi, 2011. "Portfolio allocation for public pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(02), pages 221-245, April.
Published as Portfolio Allocation for Public Pension Funds , George Pennacchi, Mahdi Rastad. in The Economics of State and Local Pensions , Brown and Clark. 2011

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Related works:
Journal Article: Portfolio allocation for public pension funds* (2011)
Chapter: Portfolio Allocation for Public Pension Funds (2010)
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