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Should the Indonesian pension funds invest abroad?

Author

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  • Kariastanto, Bayu

Abstract

Currently, the Indonesian pension fund is prohibited from investing in international assets. In this paper, I quantitatively investigate the benefit and/or the cost, if any, caused by this constraint. Standard mean-variance techniques will be used along with Monte Carlo simulation to check the robustness of the findings. Under various assumptions, including international assets in the pension fund’s portfolio could potentially aid pension funds to have higher returns and accumulated wealth. Accordingly, the findings suggest possible reform to lessen these restrictions. Given the controversy over international diversification, a reasonable compromise that would help capture many of the potential benefits for risk-averse investors could be to create a ceiling of 20 percent for international assets.

Suggested Citation

  • Kariastanto, Bayu, 2011. "Should the Indonesian pension funds invest abroad?," MPRA Paper 33581, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33581
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    File URL: https://mpra.ub.uni-muenchen.de/33581/1/MPRA_paper_33581.pdf
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    References listed on IDEAS

    as
    1. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(1), pages 77-83, March.
    2. Ajantha Kumara & Wade Pfau, 2013. "Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants," Annals of Finance, Springer, vol. 9(3), pages 319-335, August.
    3. Driessen, Joost & Laeven, Luc, 2007. "International portfolio diversification benefits: Cross-country evidence from a local perspective," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1693-1712, June.
    4. W Pfau, 2009. "The Role of International Diversification in Public Pension Systems: The Case of Pakistan," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 81-106, September.
    5. Wade D. Pfau, 2011. "Emerging Market Pension Funds and International Diversification," Journal of Developing Areas, Tennessee State University, College of Business, vol. 45(1), pages 1-17, July-Dece.
    6. Lagoarde-Segot, Thomas & Lucey, Brian M., 2007. "International portfolio diversification: Is there a role for the Middle East and North Africa?," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 401-416, December.
    7. Wade D. Pfau, 2008. "Emerging Market Pension Funds and International Diversification," GRIPS Discussion Papers 08-10, National Graduate Institute for Policy Studies.
    8. Ajantha Sisira Kumara & Wade Pfau, 2012. "Reforming Pension Funds In Sri Lanka: International Diversification And The Employees' Provident Fund," Australian Economic Papers, Wiley Blackwell, vol. 51(1), pages 23-37, March.
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    More about this item

    Keywords

    Pension Fund; International Diversification; Asset Allocation; Hypothetical Worker; Indonesia;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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