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Sovereign Wealth Funds Asset Allocation Strategy Based On Black-litterman Model

Posted on:2015-12-03Degree:MasterType:Thesis
Country:ChinaCandidate:R YinFull Text:PDF
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This paper discusses the asset allocation of Sovereign Wealth Fund(SWF). At present, China has a large number of foreign reserve. And ourSWF’s return is still insufficient compared with other countries’ SWF. Sothis paper is trying to establish the asset allocation based onBlack-Litterman Model, at the same time, to hedge the foreign currencyrisk for China Investment Corporation (CIC).Firstly, we analyzed the reason for the rapid development of SWF, andthe SWF’s characteristics different from the gernal fund. Then we focusedon the CIC’s established background, governance structure, investmentcharacteristics and current investment performance. From the aboveanalysis, we found that although CIC’s investment managementframework is becoming matures, its overseas investment income is stillinsufficient; what’s more, CIC has the responsibility of diversification offoreign exchange reserve. While seeking to maximize their return on assetallocation, they should take into account the risk of hedge the foreigncurrency risk, But CIC’s investment strategy does not take into account theabove factors.Then, we try to establish a model to solve the above problem. The model has two steps, firstly, we introduced the Black-Litterman Model, inorder to get more accurate returns; secondly, we establish asset allocationstrategy to hedge the foreign reserve flunction.We selecter16countries as CIC plan to invest whose GDP arepredicted to be the top20by2015. We used the16countries’ MSCImonthly data as invested target, to do the empirical analysis.Finally, the results show that:(1)The higher the correlation betweenthe exchange rate and country index, the higher the rebalanced weightwhich should be reduced in the traditional SWF optimal portfolio;(2)Considering the invested countries political and financial open situation,we give the restriction on short selling. So based on the good liquidity ofdeveloped market, CIC should focus on the developed countries;(3) Dueto join the investors’ subjective expectations of bearish emerging markets,although the emerging markets countries’ return is higher the developedmarkets, the model suggests that the Chinese SWF reduce investmentweight in the U.S. and emerging markets, increase European countriesweigh...
Keywords/Search Tags:Sovereign wealth funds, Black-Litterman model, Dollarcurrency rate, MSCI data, Background risk, Strategicasset allocation
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