Dynamic Asset Allocation for Oil based SovereignWealth_Funds Hedging Demands and International Diversification Effects

Abstract

The goal of this study is finding the dynamic asset allocation strategy for oil-based sovereign wealth funds. We have investigated the intertemporal hedging demands for assets for SWF in the U.S., and Canada, which can invest domestically and internationally. Using an Epstein-Zin-Weil utility function, where the dynamics governing asset returns are described by a vector autoregressive process. Our findings stress the importance of the mean intertemporal hedging demands for domestic stocks in the U.S. and to smaller extinct in Canada. A SWF in the U.S. displays small mean intertemporal hedging demands for foreign assets, while SWF in Canada exhibits sizable mean hedging demands for U.S. stocks. The international diversification seems more beneficial in Canada than U.S.