The Research On The Optimal Intertemporal Asset Allocation Of Pension Fund

As of the end of2011, the balances of China’s basic pension fund has been up to195million yuan, but its main investment area has been limiting to low-income inter-bank deposit agreements with a small amount of government bonds. According to statistics, the average profit of the pension fund was less than2%in the past10years, and the annual return was negative after deducing the effect of inflation. The long time low-income level of the pension fund has been making these huge balances surplus difficult to share capital appreciation due to China’s rapid economic development. Not only the future welfare of the insured would be reduced, but also the solvency of the fund would be greatly threatened. Therefore, raising the long-term investment return, effective safety protection, and establishing a suitable theoretical frame work for long-term investment portfolio of pension fund, are hot and difficult issues in both the industry and academia currently.However, there are still two aspects of problems in current researches:(1) Although foreign scholars were almost sound on the theoretical frame work of long-term investment portfolio, in fact, empirical research was carried out in market backgrounds of these mature market countries so that the findings might not be applied to these emerging market countries;(2) Existing domestic researches, or descriptive statistics based on the long-term risk of the assets, are lack of rigorous theoretical support; or have made too many assumptions and limitations to the assets, such as only containing stocks and risk-free assets whose return is a constant in the portfolio. Since these researches cannot truly reflect the pension fund’s portfolio composition, the practicality of the consequences is limitative.Accordingly, in this paper, started from the periodicity of the asset return, without risk-free asset, we select three representative assets:short-term bank deposits, stocks and long-term bonds, and three state variables:credit risk spreads, unexpected inflation and the spread between long and short interest rates.Based on China’s accrual financial market situations, we describe the dynamic relationship between the assets return and state variables through VAR(1) model, finding term structure of investment efficiency and optimal intertemporal asset allocation.This paper shows that asset returns are predictable in the long run, making the asset return and risk are time variance, as well as the correlation between different assets, and deduce the term structure of investment efficiency. The research on the term structure of investment efficiency shows that as the investment horizon goes long, the risk offset of holding bonds decrease gradually, while the case of stock doest the other way around and more importantly, the correlation between the returns of bonds and stocks deceases as well. Furthermore, the optimal intertemporal asset allocation indicates that as the investment horizon increases, the percentage of stock investment increases and reaches21%finally; the percentage of bond investment decreases and in the long run reaches75%with long-term bond and4%with short-term bond.Moreover, this pater also examines the optimal asset allocation under different risk preferences, finding that the variation of investor’s risk aversion coefficient does not affect the optimal asset allocation. However, with the risk aversion coefficient increased, short-term bank deposits, stock and long-term bonds are decline, as well as the total volume of investment, and these last for every investment horizons.Finally, this paper calculates the optimal intertemporal asset allocation and investment efficiency under the condition that asset return is predictable, finding that the optimal intertemporal portfolio has the highest investment efficiency, and has higher investment return significantly than that of individual assets in the portfolio.To sum up, this paper reveals the long-term changing rules of China’s pension fund investment portfolio return, determines the investment period related optimal portfolio, and has set up a reasonable theoretical frame work and provided solid empirical evidence for promoting the risk management capacity and asset allocation efficiency for pension fund.