Abstract:
This paper solves a dynamic asset allocation problem for a commodity sovereign wealth fund under incomplete markets. We calibrate the model using data from three countries: Norway, UAE and Chile. In our benchmark calibration for Norway, we find that the fund’s manager should initially invest all her wealth to stock and reduce this fraction gradually over time. We find that the solution is particularly sensitive to the assumption about the volatility of commodity prices. The solution for Chile implies that for relatively high risk aversion coefficients the manager should start at a small fraction of her wealth to increase later over the life cycle of the fund.
Alfonso Irrarazabal. Photo: Yudi Wen