Key Takeaways
- • Pension funds supply stock market liquidity in emerging market countries, according to a panel study of seventeen EM countries covering 2006–2019 that finds a robust negative relationship between pension fund assets and two illiquidity measures (Zeros and Amihud).
- • The liquidity provision by pension funds does not change during crisis periods, with the study testing the Global Financial Crisis and the European Sovereign Debt Crisis and finding the effect equally significant in both.
- • Pension funds' long-term, predictable liabilities allow them to act as countercyclical, deep-pocket investors, though related research also documents pension funds being forced to sell assets during liquidity spirals.
- • Pension fund assets exceeded $35 trillion by end-2020 according to OECD (2021) figures cited in the study, with emerging market pension assets rising from 13% to 20% of GDP over the past decade.
Summary
A research paper published via Investments and Wealth Monitor examines whether pension funds contribute to stock market liquidity in emerging market (EM) economies. Using panel data for seventeen EM countries during 2006–2019, the study finds that pension funds supply liquidity to financial markets and that this relationship is not altered during periods of crisis. The author evaluates liquidity through three measures: the Zeros measure of Lesmond et al. (1999), Roll's measure (1984), and the Amihud illiquidity ratio (2002), which together capture resiliency, tightness, and depth. The empirical approach uses a Prais-Winsten fixed-effects regression with panel-corrected standard errors and includes multiple robustness checks, including EU versus non-EU sample splits and exclusion of crisis periods.
The study's motivation rests on the scale of the pension sector. According to OECD (2021) figures cited in the paper, pension fund assets exceeded $35 trillion by the end of 2020, with more than half managed by U.S. pension funds. Total pension assets relative to GDP rose from 13% to 20% in EM countries and from 43% to 63% in developed markets over the past decade, despite losses during the 2008 Global Financial Crisis and the 2011 European Sovereign Debt Crisis.
The paper frames pension funds as patient capital with long-dated, predictable liabilities funded by contributions and generally unleveraged, which allows them to buy assets during price declines. The authors cite Financial Stability Board (2014) research describing pension funds as major providers of liquidity and collateral in stressed markets, and OECD (2010) data showing EM pension funds increasing equity exposure during the GFC. The study also notes that outflows of roughly $150 billion from foreign portfolios in EM countries after the GFC and EDC episodes created a scarcity of market liquidity.
The paper's policy implication is that automatic enrollment, which could enlarge pension fund assets, may enhance financial stability in EM countries. Related literature cited in the study points in differing directions: Bonizzi's work on UK pension funds (2023) argues that certain behaviours have increased exposure to liquidity spirals, forcing asset sales during crises, while a Review of Financial Studies paper by Jansen (2026) finds that interest rate swap hedging exposes pension funds to liquidity risk via margin calls. The full article could not be retrieved, so these findings rest on the abstract, introduction, and literature review excerpts available.
The study's motivation rests on the scale of the pension sector. According to OECD (2021) figures cited in the paper, pension fund assets exceeded $35 trillion by the end of 2020, with more than half managed by U.S. pension funds. Total pension assets relative to GDP rose from 13% to 20% in EM countries and from 43% to 63% in developed markets over the past decade, despite losses during the 2008 Global Financial Crisis and the 2011 European Sovereign Debt Crisis.
The paper frames pension funds as patient capital with long-dated, predictable liabilities funded by contributions and generally unleveraged, which allows them to buy assets during price declines. The authors cite Financial Stability Board (2014) research describing pension funds as major providers of liquidity and collateral in stressed markets, and OECD (2010) data showing EM pension funds increasing equity exposure during the GFC. The study also notes that outflows of roughly $150 billion from foreign portfolios in EM countries after the GFC and EDC episodes created a scarcity of market liquidity.
The paper's policy implication is that automatic enrollment, which could enlarge pension fund assets, may enhance financial stability in EM countries. Related literature cited in the study points in differing directions: Bonizzi's work on UK pension funds (2023) argues that certain behaviours have increased exposure to liquidity spirals, forcing asset sales during crises, while a Review of Financial Studies paper by Jansen (2026) finds that interest rate swap hedging exposes pension funds to liquidity risk via margin calls. The full article could not be retrieved, so these findings rest on the abstract, introduction, and literature review excerpts available.
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