Paper #894

Title:

Portable alphas from pension mispricing

Authors:

José M. Marín and Francesco Franzoni

Date:

October 2005

Abstract:

We introduce a new dynamic trading strategy based on the systematic misspricing of U.S. companies sponsoring Defined Benefit pension plans. This portfolio produces an average return of 1.51% monthly between 1989 and 2004, with a Sharpe Ratio of 0.26. The returns of the strategy are not explained by those of primary assets. These returns are not related to those of benchmarks in the alternative investments industry either. Hence, we are in the presence of a "pure alpha" strategy that can be ported into a large variety of portfolios to significantly enhance their performance.

Keywords:

Defined Benefit Plans, Portable Alpha, Enhanced Indexing, Pension Contributions, Pricing Anomaly

JEL codes:

D8, G11, G12, G14

Area of Research:

Finance and Accounting

Published in:

Journal of Portfolio Management, pp. 44-53, Summer 2006

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