Stefano Lugo

Testing the Strategic Asset Allocation of Stabilization Sovereign Wealth Funds

None of the models that have been developed to determine the optimal strategic asset allocation (SAA) of stabilization sovereign wealth funds (SWFs) has received direct empirical validation, primarily because there is a lack of transparency regarding some of the key parameters that characterize the problem. In this paper, building on a mean-variance framework, we derive three sets of parsimonious statistical tests to compare the actual SAA of SWFs to a theoretical optimum. We apply these tests to the portfolio of the worlds largest stabilization SWF (the Norwegian Government Pension Fund - Global or GPF) for the period between 2002 and 2005. The empirical analysis confirms that the static and dynamic deviations of the GPFs SAA from the market equity portfolio are consistent with the theoretical predictions.

The Use of Debt by Sovereign Wealth Fund

In this paper we document the use of debt capital by Sovereign Wealth Funds (SWFs). According to our estimates, as of 2014 there are 10 levered SWFs with outstanding debt around USD 180 billion. We identify three main reasons why SWFs may decide to resort to debt capital, namely: i) increasing their size and diversify their sources of funding; ii) contributing to the development of their domestic bond market, and; iii) optimizing their cost of financing at the group level. Characteristics of levered SWFs -- as opposite to funds restrained from using debt -- are consistent with these goals. The use of debt is less common among SWFs from democratic countries, where it can entail higher political risk. Finally, we address the credit risk of levered SWFs and its relationship with the credit risk of their countries’ governments.

Fondi sovrani: opportunità, minacce, speranze e illusioni

Sovereign wealth funds: opportunities, threats, hopes and illusions - In this work we provide a critical summary of the debate about sovereign wealth funds (SWFs). We start by explaining what a SWF is and what it is not according to the various definitions that have been proposed. We then present the main concerns and hopes which SWFs have raised and explain why these threats and opportunities are often exaggerated, incorrect or, at the best, not yet supported by any serious empirical evidence. We devote particular attention to the issue of the transparency of SWFs and show that, while there still is ample room for improvement, SWFs are clearer now than what they used to be before the Santiago principles were signed. We also point out, however, that there are sound reasons to believe that transparency, if pushed too far, could be detrimental to both SWFs and recipient countries. Finally, we present the results of the first attempts made by academics and practitioners to provide systematic evidence on SWF investment behaviour. Keywords: sovereign wealth funds, transparency, global imbalances, foreign investments Parole chiave: fondi sovrani, trasparenza, squilibri globali, investimenti esteri Jel Classification: F21 - G15 - H27

Rating Alignment, Rating Shopping and Reputation of Credit Rating Agencies: Evidence from the Subprime Crisis

This paper compares conflict of interest incentives and reputational concerns of credit rating agencies (CRAs) in the context of the subprime crisis. We argue that, during up-market periods, ratings levels are affected by both a strong tendency for alignment across CRAs and ratings “shopping” by issuers, while, during periods of economic slowdown, these distortions disappear since CRAs are then more concerned about their long-run reputation. We test our hypotheses by analyzing the gap between Moodys and S&Ps ratings on US residential, subprime mortgage-backed securities before and after the 2007 crisis. Overall, our results show a clear reduction in ratings alignment. Moreover, we find strong evidence that harsher downgrades came from S&P, which had higher ratings before the crisis, and that the gap reduction is strongly correlated with the rating gap before the crisis. We interpret this as evidence that CRAs try to “reverse the gap”, to reduce the impact on their (relative) reputation. Finally, we find that harsher downgrades tend to occur for securities not jointly rated and that the relation between downgrades and initial rating is significantly different across the two agencies, this being consistent with the rating shopping hypothesis.