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Pension funds, large capital inflows and stock returns in a thin market



Using unique data about capital flows from the public social security institute ZUS (Zakład Ubezpieczeń Społecznych) to private pension funds OFEs (Otwarte Fundusze Emerytalne) in Poland, we find that their impact, as a group of large institutional investors, on stock returns is statistically significant in short-term but no such effect exists in the long-run. This result is consistent with the temporary price pressure hypothesis of Ben-Rephael et al. (2011). We analyze the capital transfers, in the form of the aggregated pension contributions collected from all employees in the entire Polish economy, from the ZUS to the private pension funds, which further invest this capital on the stock market. The average time for the subsequent reaction of stock prices is found to be 4 days. The trading strategy based on this result generates superior outcomes in comparison with the passive strategy, which further confirms the price impact of capital inflows. Our findings are not only relevant for stock market investors but they also have broader policy implications for stock market regulators and for the national pension regulators.



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We are grateful to Ludwig Chincarini, Tom Vinaimont, Martha O’Hagan-Luff, David Cobham, Bruce Lehmann, Jerzy Gajdka, Jacques Melitz, Mark Schaffer, the participants of the 9th INFINITI Conference on International Finance at the Trinity College in Dublin, Ireland (on June 13–14, 2011), 86th Annual Conference of the Western Economic Association International (WEAI) in San Diego, CA, USA (on June 29–July 3, 2011), International Finance and Banking Society (IFABS) conference in Valencia, Spain (on June 18–20, 2012), INWEST '2014 conference in Wrocław, Poland on (September 17–19, 2014) and the participants of the research seminars at the Heriot-Watt University in Edinburgh and at the Narodowy Bank Polski (NBP) in Warsaw for helpful comments on this and earlier versions of our paper. Dobromił Serwa thanks Piotr Szpunar, Olga Szczepańska, Marta Gołajewska and colleagues from the Financial Stability Department in the Narodowy Bank Polski (NBP) for advice and support.



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