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

Dirk Broeders, Kristy Jansen, Bas Werker

Research output: Contribution to journalArticleAcademicpeer-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
JournalJournal of Pension Economics & Finance
DOIs
Publication statusE-pub ahead of print - 2020

JEL classifications

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

Keywords

  • asset allocation
  • asset liability management
  • capital requirements
  • Illiquid assets
  • liquidity requirements
  • pension funds

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