Asset Allocation Dynamics of Pension Funds

Bams, Dennis; Schotman, Peter C.; Tyagi, Mukul

doi:10.2139/ssrn.2766491

Cited by 7 publications

(7 citation statements)

References 30 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…There exists substantial evidence on the linkages between trading behavior of corporate pension plans with prior results. Bams et al (2016) use pension funds data for the USA, Canada and Europe and find that significant portion of changes in the weight of equity is due to past realized returns. They find that pension funds rebalance 80–90 percent of equity variation annually and a major portion of such reallocation is attributed to past returns.…”

Section: Modelmentioning

confidence: 99%

Behavioral biases and retirement assets allocation of corporate pension plans

Verma

2018

RBF

View full text Add to dashboard Cite

Purpose The purpose of this paper is to investigate the existence of behavioral biases, disposition effect and house money effect in investment decisions of defined benefit pension funds. It investigates the determinants of portfolios by examining whether pensions display risk seeking or risk aversion behavior in reaction to prior gains and losses. Design/methodology/approach The first research question is to examine the impact of prior period’s return and αs on existing portfolio allocation in equity, debt, real estate and other assets. In order to test this relationship, four separate regressions are estimated using the pooled data. Regression helps in examining the relationship between prior gains with current allocation in four categories of assets of varying degrees of riskiness (stocks, debt, real estate and other assets). In order to investigate the second research question on whether pension funds increase (decrease) their investments in risky (safer) assets due to prior gains and αs, the four variables representing the changes in portfolio allocation for each asset class over one period are employed. These changes in allocation are regressed against the prior year’s actual return, expected return, αs and a set of control variables. Findings The results suggest significant negative (positive) relationship between prior positive returns and αs with portfolio allocation in risky (safer) assets. Also, there is an increased (decreased) investment in safer (risky) assets following prior period’s positive returns and αs. The findings confirm the existence of disposition effect, while there is no evidence of house money effect. Originality/value The portfolio allocation of pension plans provides unique setting to investigate the relevance of behavioral finance and examine the role of psychological biases on risk taking. This study attempts to contribute to the literature by empirically investigating whether the tenets of behavioral finance are relevant in defined benefit pension fund’s portfolio allocation decisions. Specifically, it focuses on the determinants of portfolio choices by directly investigating pension funds’ reaction to prior period’s actual as well as risk adjusted return (or αs – the difference between the actual and expected return).

show abstract

Section: Modelmentioning

confidence: 99%

Behavioral biases and retirement assets allocation of corporate pension plans

Verma

2018

RBF

View full text Add to dashboard Cite

show abstract

“…For each episode, we calculated the active portfolio allocation to risky assets (defined as equities and alternative assets). Following Calvet, Campbell, and Sodini (2009) and Bams, Schotman, and Tyagi (2016), we decomposed the total changes in risky-asset allocations into a passive change (attributable to movement in the overall market) and an active change (resulting from portfolio rebalancing by the endowment). Our main finding is that during the run-up to a crisis, the 12 endowments typically decrease their active risky allocations whereas after the onset of the crisis, the endowments increase these allocations as risky-asset prices fall.…”

Section: Fourth Quarter 2020mentioning

confidence: 99%

“…To capture active allocation changes, we adopted the methodology described in Calvet et al (2009) and Bams et al (2016), which decomposes the total change in asset allocation into a passive change (resulting from market fluctuations) and an active change (caused by rebalancing). We estimated the active changes by using the US equity and corporate bond total-return index series from Dimson et al (2020).…”

Section: Do Endowments Behavementioning

confidence: 99%

Seventy-Five Years of Investing for Future Generations

Chambers

Dimson

Kaffe

2020

Financial Analysts Journal

View full text Add to dashboard Cite

“…To capture active allocation changes, we adopt the methodology described in Calvet, Campbell and Sodini (2009) and Bams, Schotman and Tyagi (2016), which decomposes the total change in asset allocation into a passive change (due to market fluctuations) and an active change (due to rebalancing). We estimate the active changes using the U.S. equity and corporate bond total return indices data from Dimson, Marsh and Staunton (2020).…”

Section: Do Endowments Behave Countercyclically?mentioning

confidence: 99%

“…In each episode, we calculate the active portfolio allocation to risky assets defined as equities and alternative assets. Following Calvet, Campbell and Sodini (2009) and Bams, Schotman and Tyagi (2016), we decompose the total changes in risky asset allocations into a passive change (attributable to movement in the overall market) and an active change (due to portfolio rebalancing by the endowment). Our main finding is that typically during the run-up to a crisis, endowments decrease their active risky allocations; while after the crisis onset, they increase these allocations as risky asset prices fall.…”

mentioning

confidence: 99%