Abstract
This article draws on stylized facts to build a dynamic portfolio allocation model of sovereign wealth funds (SWF). We show that a traditional dynamic Merton allocation model allows for the stylized evidence that, on the one hand, the shares of monetary assets in such funds grow with the risk aversion of the state-investor in time, and on the other hand, these funds include the presence or absence of hedge funds correlated to the financial situation. One weakness of this model is its prediction of a lower risk/riskier asset ratio for sovereign stabilization funds and generational savings sovereign funds. This result contradicts the stylized fact of a lower risk/riskier asset ratio in stabilization funds than in generational savings funds. A dynamic model inspired by the theoretical framework of Bajeux-Besnainou et al. [1] is compatible with all the stylized facts.
Highlights
Sovereign wealth funds seem to be on the rise in Africa
We show that a traditional dynamic Merton allocation model allows for the stylized evidence that, on the one hand, the shares of monetary assets in such funds grow with the risk aversion of the state-investor in time, and on the other hand, these funds include the presence or absence of hedge funds correlated to the financial situation
Which dynamic theoretical model is likely to reproduce all the stylized facts, making it possible to explain the practice of the strategic allocation of the sovereign wealth funds? Because sovereign wealth funds have risky asset ratios that are dependent on the risk profile of the investing state, they can be likened to profiled funds or lifestyle funds
Summary
Received: November 10, 2018 Accepted: January 29, 2019 Published: February 1, 2019
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