Macrofinancial Linkages of the Strategic Asset Allocation of Commodity-Based Sovereign Wealth Funds

By Aaron Howard Clifford Brown, Michael G. Papaioannou, Iva Petrova

January 1, 2010

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Aaron Howard Clifford Brown, Michael G. Papaioannou, and Iva Petrova. Macrofinancial Linkages of the Strategic Asset Allocation of Commodity-Based Sovereign Wealth Funds, (USA: International Monetary Fund, 2010) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyses the links between the investment strategies of a commodity-based SWF and the macroeconomic framework of the owner country. We examine some basic macrofinancial linkages of an SWF's strategic asset allocation (SAA) strategies with regard to the government budget, monetary policy, and exchange rate movements. Based on a simple Markowitz-model framework, which integrates the specific objectives and constraints facing an SWF and the country's specific characteristics and macroeconomic vulnerabilities (especially in relation to commodity prices and prospective defined liabilities), we derive an SAA. The asset-liability methodology that is applied in the selection of an SWF SAA also allows assessing whether (i) the SAA adequately takes into account the country-specific risks and vulnerabilities, and (ii) its objectives and macrofinancial constraints are consistent. Some analytical and practical issues in determining an SAA model are also discussed, along with key effects of a financial crisis.

Subject: Currencies, Exchange rates, Financial institutions, Foreign exchange, Money, Oil prices, Prices, Sovereign bonds, Stocks

Keywords: Asset class, Asset class correlation, Asset-liability management framework, Commodity price, Currencies, Exchange rate, Exchange rates, Expected return, Financial asset, Global, Macrofinancial Linkages, Oil prices, Portfolio return, Revenue gap, Sovereign bonds, Sovereign Wealth Funds, Stabilization SWF, Stocks, Strategic Asset Allocation, SWF asset investment, SWF asset performance, SWF asset portfolio, SWF assets, SWF resource, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/009
Stock No:

WPIEA2010009
ISBN:

9781451961904
ISSN:

1018-5941

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