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Investment decisions in crises — A study of private pension fund investments

Author

Listed:
  • E. Kovács

    (Faculty of Economics, Corvinus University of Budapest, Department of Finance, Fővám tér 8, H-1093 Budapest, Hungary)

  • B. Dömötör

    (Department of Finance, Corvinus University of Budapest, Department of Finance, Fővám tér 8, H-1093 Budapest, Hungary)

  • H. Naffa

    (Corvinus University of Budapest, Department of Finance, Fővám tér 8, H-1093 Budapest, Hungary)

Abstract

Private pension funds were thought to be an important pillar of old-age provision when they were introduced throughout (Emerging) Europe. As different as these funds are in different countries with regards to their regulation, their ownership structure and operation, none were immune to the sub-prime led financial crisis. The Hungarian private pension funds are unique amongst the defined contribution (DC) funds. With their decade old recent history, they are maturing to the payout period in a few years’ time; however, their demise appears ever more realistic by means of political decision. This makes uncovering their investment policy during the crises very timely. Examining such a period is of importance in shedding light on the behaviour of traditional financial concepts in periods of stress. In this paper, we assess the optimality of diversification, hedging and short sales decision possibilities of the Hungarian pension funds in the equity investments environment. Was the net asset value (NAV) erosion suffered by the Hungarian private pension funds a result of their investment decision? We examine this question of diversification through a hypothetical simulation of model investment portfolios. Our results show that international diversification yields better risk-adjusted returns only in case of perfect hindsight of future market movements. The high correlation of the stock indices globally in times of crises limits the benefits of diversification.

Suggested Citation

  • E. Kovács & B. Dömötör & H. Naffa, 2011. "Investment decisions in crises — A study of private pension fund investments," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(4), pages 389-412, December.
    • Handle: RePEc:aka:aoecon:v:61:y:2011:i:4:p:389-412
    Note: H. Naffa’s contribution was supported by TÁMOP-4.2.1. B-09/0/KMR-2010-0005 project financed by the European Union and co-financed by the European Social Fund. The authors express their gratitude to two anonymous referees for their invaluable comments that helped augment the level of this paper in both content and structural format. Any possible shortcomings are solely the responsibility of the authors.
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    More about this item

    Keywords

    financial crises; pension funds; portfolio performance; Hungary;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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