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

Dirk Broeders, Kristy Jansen, Bas Werker

Research output: Working paper / PreprintWorking paper


This paper empirically assesses the impact of liquidity and capital constraints on the allocation of defined benefit pension funds to illiquid assets. Liquidity constraints result from short-term pension payments and collateral requirements on derivatives. Capital constraints follow from the requirement to retain sufficient capital to absorb unexpected losses. Liability duration and
hedging affect the allocation to illiquid assets through both these constraints. First, we find a hump-shaped impact of liability duration on the illiquid assets allocation. Up to 17.5 years, liability duration positively affects the illiquid asset allocation. However, beyond this point the effect is reversed as the capital constraint dominates the liquidity constraint. Second, we find no evidence that interest rate hedging affects the illiquid assets allocation. Third, we do find that currency risk hedging positively impacts the illiquid assets allocation.
Original languageEnglish
PublisherDe Nederlandsche Bank
Number of pages65
Publication statusPublished - 2017

Publication series

SeriesDNB Working Paper

JEL classifications

  • g11 - "Portfolio Choice; Investment Decisions"
  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"


  • Illiquid assets
  • asset liability management
  • asset allocation
  • liquidity constraints
  • capital constraints
  • pension funds
  • Regulation

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