Empirical analysis of risk taking, investment efficiency and diversification in Turkish defined contribution pension plans

Abstract

This article empirically studies the risk levels of individual pension portfolios, investment efficiency and also the diversification of the pension investors in Türkiye with a novel administrative data with the month-end snapshots in December 2019. To examine the risk taking behavior, investment efficiency and the level of diversification of the Turkish pension investors, we compute beta coefficients, total risk together with idiosyncratic and systematic risk, Sharpe Ratio, the loss from under-diversification of investors’ pension portfolios. The results indicate that a substantial heterogeneity is evident in portfolio risk and the idiosyncratic risk contributes much more. We also find significant evidence on the inefficiency of investment and our results suggest that most of the Turkish pension investors design their portfolios inefficiently. The losses from under-diversification is widespread among Turkish investors as only a quarter of investors achieve risk reward profile better than the risk reward profile of the domestic benchmark equity index BIST 100.