Scandinavian Working Papers in Economics

Working Papers,
Hanken School of Economics

No 532: The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions

Hans-Kristian Sjöholm ()
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Hans-Kristian Sjöholm: Swedish School of Economics and Business Administration, Postal: Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland

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

15 pages, November 7, 2007

Price: 10

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