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The optimal spending rate versus the expected real return of a sovereign wealth fund

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  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Bjerksund, Petter

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund’s expected real rate of return. The optimal spending rate secures that the fund will last ”forever”. Spending the expected return will deplete the fund with probability one. Moreover, this strategy is inconsistent with optimal portfolio choice. Our results are contrary to the idea that it is sustainable to spend the expected return of a sovereign wealth fund.

Suggested Citation

  • Aase, Knut K. & Bjerksund, Petter, 2021. "The optimal spending rate versus the expected real return of a sovereign wealth fund," Discussion Papers 2021/1, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2021_001
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    5. Aase, Knut K., 2016. "Life Insurance And Pension Contracts Ii: The Life Cycle Model With Recursive Utility," ASTIN Bulletin, Cambridge University Press, vol. 46(1), pages 71-102, January.
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    Cited by:

    1. Aase, Knut K., 2023. "Optimal spending of a wealth fund in the discrete time life cycle model," Discussion Papers 2023/7, Norwegian School of Economics, Department of Business and Management Science.
    2. Knut Kristian Aase, 2024. "Optimal Spending Strategies for Sovereign Wealth Funds Using a Discrete-Time Life Cycle Model," JRFM, MDPI, vol. 17(8), pages 1-41, July.
    3. Knut Anton Mork & Haakon Andreas Trønnes & Vegard Skonseng Bjerketvedt, 2022. "Capital Preservation and Current Spending with Sovereign Wealth Funds and Endowment Funds: A simulation Study," IJFS, MDPI, vol. 10(3), pages 1-24, August.
    4. Knut Anton Mork & Haakon Andreas Trønnes & Vegard Skonseng Bjerketvedt, "undated". "Capital preservation and current spending with Sovereign Wealth Funds and Endowment Funds: A simulation study," Working Paper Series 19222, Department of Economics, Norwegian University of Science and Technology.

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    More about this item

    Keywords

    Optimal spending rate; endowment funds; expected utility; risk aversion; EIS; recursive utility;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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