Pension fund's illiquid assets allocation under liquidity and capital requirements

Dirk W. G. A. Broeders*, Kristy A. E. Jansen, Bas J. M. Werker

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.
Original languageEnglish
Pages (from-to)102-124
JournalJournal of Pension Economics and Finance
Volume20
Issue number1
DOIs
Publication statusPublished - Jan 2021

Keywords

  • Asset allocation
  • asset liability management
  • capital requirements
  • illiquid assets
  • liquidity requirements
  • pension funds
  • INVESTMENT POLICY
  • RISK-MANAGEMENT
  • PERFORMANCE
  • LIABILITIES
  • SCALE

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