The Impact of Pension Funds on Financial Markets

This paper empirically explores the impact of pension funds on market volatility, equity prices, government and corporate bond yields for a panel of 24 countries. The results show a positive and statistically significant relationship between market volatility and pension assets. It complements micro evidence (Dennis and Strickland, 2002) as well as macro findings (Davis, 2004). In addition, equity prices are found to be positively correlated with pension funds, a finding observable for both OECD countries and emerging market economies (EMEs) and present in both the short and long terms. Furthermore, there is evidence indicating a negative link between pension fund assets and both corporate and government bond yields. This might be due to the sizeable buying effects of pension funds, particularly when governments have the tendency to use pension funds to finance implicit pension debts when the traditional pay-as-you-go systems shift to funded systems.