Optimal Asset Allocation for Commodity Sovereign Wealth Funds

Alfonso Irarrazabal, Lin Ma, Juan Carlos Parra-Alvarez

Publikation: Working paper/Preprint Working paperForskning

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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.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider49
StatusUdgivet - aug. 2020
NavnCREATES Research Paper
Nummer2020-10

Emneord

  • Optimal asset allocation
  • Sovereign wealth fund
  • Commodities
  • Income risk
  • Suboptimal investments

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