Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows
We consider the portfolio choice of a government with a Sovereign Wealth Fund (SWF) when government revenues depend on exhaustible resources, such as oil and gas. The question is whether the SWF portfolio should underweight shares in the resource industry. Some studies have found that these share pr...
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-03-01
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| Series: | International Journal of Financial Studies |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7072/8/1/14 |
| _version_ | 1818047528468217856 |
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| author | Knut Anton Mork Hanna Marisela Eap Magnus Eskedal Haraldsen |
| author_facet | Knut Anton Mork Hanna Marisela Eap Magnus Eskedal Haraldsen |
| author_sort | Knut Anton Mork |
| collection | DOAJ |
| description | We consider the portfolio choice of a government with a Sovereign Wealth Fund (SWF) when government revenues depend on exhaustible resources, such as oil and gas. The question is whether the SWF portfolio should underweight shares in the resource industry. Some studies have found that these share prices correlate more closely with the overall stock market than the resource price, which would seem to weaken the case for underweighting. However, equity price movements depend not only on changes in expectations of future cash flows, but also on time variation in discount factors. We analyze cash flows directly, rather than trying to disentangle these effects. We have collected cash-flow data for the companies in all of the major industries of the FTSE Global All Cap index, the basis for the strategic index of the Norwegian Government Pension Fund Global. Subsequently, we look at the correlations between each industry’s cash flow and the Norwegian government’s cash flow from oil and gas. We find a close, statistically significant, and persistent correlation for the oil and gas industry. The correlations for other industries are small and mostly insignificant. We believe that our findings can be used to support proposals for SWFs in countries with significant petroleum revenues to underweight shares in this industry. |
| first_indexed | 2024-12-10T10:07:13Z |
| format | Article |
| id | doaj.art-917f9e576e904ca69883d50d16757499 |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-12-10T10:07:13Z |
| publishDate | 2020-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-917f9e576e904ca69883d50d167574992022-12-22T01:53:13ZengMDPI AGInternational Journal of Financial Studies2227-70722020-03-01811410.3390/ijfs8010014ijfs8010014Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash FlowsKnut Anton Mork0Hanna Marisela Eap1Magnus Eskedal Haraldsen2Department of Economics, Norwegian University of Science and Technology, Klæbuveien 72, N-7491 Trondheim, NorwayErnst & Young AS, Dronning Eufemias gate 6, N-0191 Oslo, NorwayDanske Bank, Bryggetorget 4, N-0250 Oslo, NorwayWe consider the portfolio choice of a government with a Sovereign Wealth Fund (SWF) when government revenues depend on exhaustible resources, such as oil and gas. The question is whether the SWF portfolio should underweight shares in the resource industry. Some studies have found that these share prices correlate more closely with the overall stock market than the resource price, which would seem to weaken the case for underweighting. However, equity price movements depend not only on changes in expectations of future cash flows, but also on time variation in discount factors. We analyze cash flows directly, rather than trying to disentangle these effects. We have collected cash-flow data for the companies in all of the major industries of the FTSE Global All Cap index, the basis for the strategic index of the Norwegian Government Pension Fund Global. Subsequently, we look at the correlations between each industry’s cash flow and the Norwegian government’s cash flow from oil and gas. We find a close, statistically significant, and persistent correlation for the oil and gas industry. The correlations for other industries are small and mostly insignificant. We believe that our findings can be used to support proposals for SWFs in countries with significant petroleum revenues to underweight shares in this industry.https://www.mdpi.com/2227-7072/8/1/14concentration riskcash flow correlationsovereign wealth fund |
| spellingShingle | Knut Anton Mork Hanna Marisela Eap Magnus Eskedal Haraldsen Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows International Journal of Financial Studies concentration risk cash flow correlation sovereign wealth fund |
| title | Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows |
| title_full | Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows |
| title_fullStr | Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows |
| title_full_unstemmed | Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows |
| title_short | Portfolio Choice for a Resource-Based Sovereign Wealth Fund: An Analysis of Cash Flows |
| title_sort | portfolio choice for a resource based sovereign wealth fund an analysis of cash flows |
| topic | concentration risk cash flow correlation sovereign wealth fund |
| url | https://www.mdpi.com/2227-7072/8/1/14 |
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