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Does Regulation Matter? Riskiness and Procyclicality of Pension Asset Allocation

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Date
2014-05
Link to item file
http://dx.doi.org/10.2139/ssrn.2542577
Dewey
Economie financière
Sujet
Solvency; Pension funds; Financial stability; Regulation
JEL code
G.G1.G11; G.G2.G28; H.H5.H55
Conference name
31st International French Finance Association Conference, AFFI 2014
Conference date
05-2014
Conference city
Aix-en-Provence
Conference country
France
URI
https://basepub.dauphine.fr/handle/123456789/13624
Collections
  • DRM : Publications
Metadata
Show full item record
Author
Boon, Ling-Ni
156398 CentER, Netspar, and Tilburg University
Brière, Marie
status unknown
Rigot, Sandra
147976 Centre d'Economie de l'Université Paris Nord [CEPN]
Type
Communication / Conférence
Item number of pages
42
Abstract (EN)
In this paper, we investigate the relative importance of drivers to pension funds’ asset allocation choices. We specifically test if the contrast between regulatory approaches of public and private Defined Benefits (DB) pension funds in the US, Canada and the Netherlands have an impact on the riskiness and procyclicality of their asset allocation. Derived from panel data analysis of a unique database comprising of more than 800 pension funds’ detailed asset allocations, our results underscore the economic importance of regulation in the funds’ asset allocation choices, relative to institutional and individual funds’ characteristics. In particular, quantitative risk-based capital requirements, and to a lesser extent valuation and funding requirements (i.e., the choice of the liability discount rate) or the presence of quantitative investment restrictions, induce pension funds to significantly decrease their asset allocation to risky assets, especially to equities. Allocation to alternatives, which are comparatively treated quite favorably by solvency standards, is higher in the presence of risk-based capital requirements. Contrary to popular conviction that regulatory mechanisms encourage procyclical asset allocation, we find that funds subject to risk-based capital requirements were likely to be less procyclical during the last crisis – an outcome possibly tempered by temporary regulatory slackening in response to the crisis.

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