Scandinavian Working Papers in Economics

Working Paper Series,
Norwegian University of Life Sciences, School of Economics and Business

No 11-2018: Optimal Asset Allocation for Commodity Sovereign Wealth Funds

Alfonso A. Irarrazabal () and Lin Ma ()
Additional contact information
Alfonso A. Irarrazabal: BI Norwegian Business School, Postal: Department of Economics, BI Norwegian Business School
Lin Ma: School of Economics and Business, Norwegian University of Life Sciences, Postal: Norwegian University of Life Sciences, School of Economics and Business, P.O. Box 5003 NMBU, N-1432 Ås, Norway

Abstract: This paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund under incomplete markets. We calibrate the model using data from three countries: Norway, UAE and Chile. In our benchmark calibration for Norway, we find that the fund’s manager should initially invest all her wealth to stock and reduce this fraction gradually over time. We find that the solution is particularly sensitive to the assumption about the volatility of commodity prices. The solution for Chile implies that for relatively high risk aversion coefficients the manager should start at a small fraction of her wealth to increase later over the life cycle of the fund.

Keywords: Dynamic asset allocation; portfolio management; sovereign wealth fund; income risk

JEL-codes: E21; G11

45 pages, September 17, 2018

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