Working Papers, Hanken School of Economics
The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions
Abstract: This paper examines the potential impact of new capital
requirements on asset allocations of Finnish pension institutions. We
describe the new requirements and consider portfolio construction to
minimize regulatory capital, given the investor’s preferred level of
expected return. Results identify portfolio transactions that enhance
expected return without increasing capital needs. Regulation calls for
portfolio diversification and prudence in management, but this paper shows
that market participants can exploit inconsistencies in regulation.
Possible future consequences include capital outflows from the pension
system and an unintended decrease in pre-funding of old-age pensions.
Keywords: finnish pension system; solvency; portfolio; optimization; regulatory; arbitrage; (follow links to similar papers)
15 pages, November 7, 2007
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