Stock volatility and pension funds under an individual capitalization-based system

The existence of feedback effects between volatility and institutional investor holdings has been extensively studied for the United States. This article contributes to the literature by investigating this issue for Pension Fund Administrators (PFAs) in Chile. To this end, data on PFAsʹ holdings is gathered for 42 firms actively traded on the Santiago Stock Exchange during December 2002–July 2008. The main findings of this study are the following. First, an increase in PFAsʹ stock holdings translates into a mild effect on stock return volatility. Second, an increase in stock return volatility leads to a moderate decrease in PFAsʹ stock holdings, suggesting PFAsʹ preference for safer stocks. The key policy implication of these conclusions is that PFAsʹ stock trading does not have a destabilizing impact on the domestic stock market.