Strategic asset allocation for a country: the Norwegian case

Abstract

This paper develops a simple strategic asset allocation model for a country with non-tradable assets and liabilities. Contemporaneous correlation does not capture the long-term relationship between the non-tradable items and the financial assets. I apply cointegration and duration matching to better identify the long-term relationship. The model is applied to the case of Norway. Simulations suggest that Norway should implement a strategy which entails a higher proportion (than today’s strategy) invested in stocks. Although the new strategy is superior in several criteria and as Norway reforms its social security system, there is still considerable risk that Norway will fail to meet its liabilities. Copyright Swiss Society for Financial Market Research 2007Strategic asset allocation, Social security system, Public pensions, G11, H55,

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