Research On Allocation Of Risky Asset Of Sovereign Wealth Funds With Background Risk

Since this century, the number and size of sovereign wealth funds have rapidly increased. In the increasingly turbulent and complex environment of international financial market, SWFs’risk-resisting ability is so poor that the performance of many SWFs has fallen sharply in the crisis. We try to introduce background risk theory to asset allocation of SWFs and do a theoretical and empirical analysis on how the background risk factors affect the risky asset allocation of SWFs.First, we define the definition of SWFs discussed in this article, introduce the development and operation profile, investment characteristics of SWFs.And then identify the background risk of SWFs, which is difficult to be dispersed by portfolio investment in financial market.After that we do a case analysis for the typical SWFs in the world.Second, through building a theoretical model of optimal risky asset allocation, we proved that background risk factors affect the optimal risky asset allocation of SWFs. Conclusions are expressed as follows:(1)the stronger positive correlation between background assets of SWFs and risky assets is,the lower proportion of its holdings of risky assets is;(2) the stronger positive correlation between background liabilities of SWFs and risky assets is,the higher proportion of its holdings of risky assets is.Finally, we do an empirical test about how SWFs’background risk factors such as correlation between export earnings or fiscal revenues and MSCI ACWI, volatility of export earnings or fiscal revenues, correlation between imports spending or fiscal expenditure and the MSCI ACWI, volatility of imports spending or fiscal expenditure and the concentration of export earnings or fiscal revenues affect their risky asset allocation. Conclusions are expressed as follows:(1)Proportion of SWFs’holdings of risky assets have a negative correlation with coefficient between SWFs’ background assets and risky assets, has a positive correlation with coefficient between SWFs’ background liabilities and risky assets;(2) Proportion of SWFs’ holdings of risky assets has a negative correlation with concentration of source of SWFs’ background assets, but the result is not robust. In addition, the proportion of SWFs’ holdings of risky assets has a positive correlation with the size of SWFs which is a control variable in the model. The theoretical and empirical conclusions of this paper have a guiding role in the strategic asset allocation of SWFs from the vision of national background.