Professor Andrea Rossi will present the paper:

"The Subjective Beliefs and Portfolio Allocations of Institutional Investors"

Abstract:
We study how the subjective beliefs of institutional investors shape their multi-asset portfolio allocations. Linking the allocations of U.S. public pension funds to the long- term capital market assumptions of their general consultants, we examine the extent to which differences in subjective expected returns, volatilities, and correlations map into differences in portfolio weights. We embed these belief inputs in a mean-variance framework that incorporates heterogeneous risk aversion, non-negative weight constraints, and a benchmarking incentive (which we show can arise through institutional or informational frictions). We find that pension fund allocations are strongly and systematically related to the belief-implied mean-variance efficient allocations. Accounting for frictions is essential: it dramatically increases the pass through and explanatory power of beliefs to portfolio allocations. Overall, our results show that beliefs play a central role in institutional portfolio decisions and that frictions critically shape their transmission into observed allocations.