ABSTRACT
In this chapter, we study the opportunity loss of the Greek social security system, in terms of risk and return, caused by the in exible investment constraints under which Greek pension funds operated in the period 1958-2000. Using data on pension fund reserves as well as on money and capital market yields, we evaluate retrospectively the risks and returns of a more pro-investment fund reserve management by analyzing an indicative number of investment scenarios in local and international money and capital markets. In order to estimate local currency yields for international investment, we generate for the entire period-covering both a xed and a partially oating exchange rate regime-a corresponding series of exchange rate variations based on the o cial rate uctuations and in ation di erentials. Our results suggest that in the 43 year period, there has been a signi cant opportunity loss in the system both in risk and returns: rst, by excluding Greek bank deposits and Greek capital market securities that would have propped returns up at acceptable levels of risk and, second, by not allowing for some degree of international diversi cation that would have kept overall downside risk down. is opportunity loss could have alleviated, to some extent, the current imbalance of the system had some of the restrictive investment rules been relaxed.
