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Calculating the real return on a sovereign wealth fund

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  • Andreas Benedictow
  • Pål Boug

Abstract

We present a new methodology for calculating the real return on sovereign wealth funds (SWF) that share the investment objective of maximizing international purchasing power in terms of goods and services. Specifically, we modify the traditional approach for deflating the nominal return along three dimensions: the aggregator formula, the measure of international prices and the weighting scheme. We argue that a geometric average of price levels is an appropriate aggregator formula for capturing the deflationary effects of imports increasingly originating from low-cost countries, and that import prices paid by the SWF owner and weights reflecting the owner's import pattern are consistent with the investment objective. Our proposed approach, using the Norwegian Government Pension Fund Global as an illustration, raises the estimated average annual real rate of return over the sample period of 19982012 from 3.1% to 4.9%.

Suggested Citation

  • Andreas Benedictow & Pål Boug, 2017. "Calculating the real return on a sovereign wealth fund," Canadian Journal of Economics, Canadian Economics Association, vol. 50(2), pages 571-594, May.
    • Handle: RePEc:cje:issued:v:50:y:2017:i:2:p:571-594
    DOI: 10.1111/caje.12270
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    Citations

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    Cited by:

    1. Bahoo, Salman & Alon, Ilan & Paltrinieri, Andrea, 2020. "Sovereign wealth funds: Past, present and future," International Review of Financial Analysis, Elsevier, vol. 67(C).
    2. Benedictow, Andreas & Hammersland, Roger, 2023. "Transition risk of a petroleum currency," Economic Modelling, Elsevier, vol. 128(C).
    3. Pål Boug, 2017. "Exact and inexact decompositions of international price indices," Discussion Papers 868, Statistics Norway, Research Department.
    4. Andreas Benedictow & Pål Boug, 2022. "Exact and inexact decompositions of trade price indices," Empirical Economics, Springer, vol. 62(4), pages 1981-1994, April.
    5. Jean-Baptiste Hasse & Christelle Lecourt & Souhila Siagh, 2023. "Institutional Stock-Bond Portfolios Rebalancing and Financial Stability," AMSE Working Papers 2322, Aix-Marseille School of Economics, France.
    6. Thomas von Brasch & Ådne Cappelen & Håvard Hungnes & Terje Skjerpen, 2020. "Modeling R&D spillovers to productivity. The effects of tax policy," Discussion Papers 927, Statistics Norway, Research Department.
    7. von Brasch, T. & Cappelen, Å. & Hungnes, H. & Skjerpen, T., 2021. "Modeling R&D spillovers to productivity: The effects of tax credits," Economic Modelling, Elsevier, vol. 101(C).

    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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