Journal Article

Asset allocation efficiency from dynamic and static strategies in underfunded pension funds

Kim, Dong-soon, Lee, Kaun Y, Park, Chunsuk

2022

Overview

This study attempts to conduct a comparative analysis between dynamic and static asset allocation to achieve the long-term target return on asset liability management (ALM). This study conducts asset allocation using the ex ante expected rate of return through the outlook of future economic indicators because past economic indicators or realized rate of returns which are used as input data for expected rate of returns in the \"building block\" method, most adopted by domestic pension funds, does not fully reflect the future economic situation. Vector autoregression is used to estimate and forecast long-term interest rates. Furthermore, it is applied to gross domestic product and consumer price index estimation because it is widely used in financial time series data. Based on asset allocation simulations, this study derived the following insights: first, economic indicator filtering and upper-lower bound computation is needed to reduce the expected return volatility. Second, to reach the ALM goal, more stocks should be allocated than low-yielding assets. Finally, dynamic asset allocation which has been mirroring economic changes actively has a higher annual yield and risk-adjusted return than static asset allocation.

• Publisher: Emerald,Emerald Group Publishing Limited,Emerald Publishing,한국파생상품학회
• Subject: Asset allocation / Asset liability management / Building block / Decision making / Derivatives / Dynamic and static asset allocation / Efficiency / Expected rate of return by asset class / Filtering / Financial institutions / g110 / g230 / Hypotheses / Input data / Investment policy / Investments / Linear programming / Literature reviews / Mathematical programming / Pension funds / Securities markets / Shortfall risk / Target rate of return / Utility functions / VAR model / Volatility / 경영학