A Study On Asset Allocation For Chinese Pension Funds

The investment operation of pension funds is crucial for China's pension system.It is of great significance to improve the social security system of our country by optimizing the investment operation of pension funds,maintaining the security of the funds and realizing the preservation and appreciation.Asset allocation is the core of the pension fund investment operation,which determines the fund's long-term return level.To optimize the investment and operation of China's pension funds,it is necessary to establish a scientific and systematic asset allocation decision-making system.Meanwhile,asset allocation is also the forefront of asset management and investment research.However,empirical research on the corresponding issues in China is very limited.Therefore,it is of great theoretical and practical significance to carry out a study on the asset allocation of pension funds in China,which can not only enrich the applications of modern financial theories in China's capital market,but also provide suggestions for optimizing the investment and operation of pension funds.For the purpose of optimizing the investment and operation of pension funds in China,this paper makes a systematic study on the allocation of Chinese pension fund assets in the framework of Modern Portfolio Theory,obtains several theoretical and empirical conclusions,and makes suggestions to regulators and investors respectively.First of all,this paper reviews the theories of asset allocation and corresponding research results on the practice of pension fund allocation.The paper studies three cases,e.g.Cal PERS,ATP and GPFG,summarizes the experience of overseas pension funds and finds some insights for China's pension fund managers to make better decisions in asset alloction processes.This paper studies the present situation of asset allocation practice in China's pension funds,summarizes experience,points out the existing problems and puts forward corresponding suggestions.Secondly,the paper proposes to establish an asset alloction optimization model with GARCH-Copula-CVa R as risk measures.In order to fully characterize the charactersics,e.g.volatility clusterings,autocorrelations,of China's capital market,the paper uses AMRA-GARCH model and multiple Copula technique to model the return distributions and dependence structures respectively,introduces CVa R as the risk measure,establishes the mean-CVa R optimization model,and uses this model to solve the asset allocation problem of pension fund.The results show that the model can capture risks more accurately than the traditional empirical estimation method.The back tests also prove that the use of the model not only can control the risks effectively,but also can improve the investment returns.For the sake of practicality,the paper also extends the model in three directions: adding private equity to the portfolio,allowing the use of leverage and modeling time-varying dependence structures.Finally,the paper proposes a tactical asset allocation scheme over economic cycle.This paper focuses on the three main variables of economic growth,inflation and monetary policy,which are the main underlying drivers of asset returns.Through a multiple MS-VAR model,this paper divides China's economic cycle into four states,or regimes: expansion,recovery,recession and peak,and studies the characteristics of capital market in various states.The results show that these regimes are able to capture pronounced time-variation in the risk and return characteristics of asset classes.In a specific regime,the risk and return characteristics of an asset class may be significantly different from those in neutrual circumstances,and one asset class may outperform or underperform the others.This paper considers the financial asset risk and return characteristics over economic cycle and the state prediction probabilities from the MS-VAR model together as “investors' expectations” into the Black-Litterman model,forming a top-down tactical asset allocation approach.The back tests prove that the introduction of the investors' expectaions is expected to improve the risk-adjusted return of the pension fund compared to the Constant Mix portfolio and the Mean-variance portfolio.