Strategic Asset Allocation for Sovereign Wealth Funds
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Event details
This seminar is hosted by Kostas.
We propose a normative strategic asset allocation model for long horizon sovereign wealth funds (SWFs). SWFs optimally choose asset allocation to smooth background shocks from persistent commodity prices and business cycles subject to a sustainable spending constraint. SWFs should have lower stock market exposure as they mature, and should use the SWF to smooth business cycle shocks, rather than commodity price shocks, in well-diversified economies.
The government’s taxation capacity, or consumption commitments, substantially affect asset allocation, and low real interest rates generate a 'reaching for yield' portfolio behaviour. Higher expected growth without a sustainability constraint generates a smaller SWF.