The importance of domestic equity pension funds on stock market

ABSTRACT This study examines for the first time the true impact of domestic pension funds investing in equities on the stock market development from a comprehensive perspective. Specifically, we analyse the influence of three pension fund variables (the portions of domestic equity pension funds over total pension funds assets and gross domestic product, and the pension fund return) on market size, liquidity, activity, growth, return and volatility in eight European stock markets, both in the short and long term. Our results show higher influence on the short term than in the long term. Pension funds impact positively on the short- and long-run market size, return and stability. Nonetheless, they only encourage short-term liquidity and activity, evidencing less frequent asset reallocation, consistent with the long-term nature of these instruments.