Abstract
We study the portfolio choice problem for an asset-liability investor who invests in stocks, equity mutual funds, government bonds, short term interest, hedge funds, listed real estate, and commodities futures available in Brazil. Inflation and real interest play as important risk sources. We estimate the asset classes and liabilities time-varying conditional covariance structure using an asymmetric multivariate dynamic conditional correlation GARCH model and compare the asset-liability portfolio's global minimum variance allocation with Brazilian pension funds' market portfolio. The conditional covariance structure provides insights about the complex dynamic relationships between the asset classes and liabilities. We find that some (though not all) Brazilian alternative assets render strong diversification and liabilities hedging benefits for asset-liability investors. There are significant strategic asset allocation differences between the market portfolio and the liability driven portfolio as given by our model. We, therefore, question the Brazilian pension funds' allocation.
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