Pension funds and stock market volatility: An empirical analysis of OECD countries

• Focus on the relationship between the share of pension funds assets invested in stocks and stock market volatility.
• We use panel data of 34 OECD countries in the time-period 2000–2010.
• We estimate random-effects model, Prais–Winsten regression and binary models.
• We provide evidence that pension funds as institutional investors dampen stock market volatility.

The paper explores the empirical relationship between the share of pension funds assets invested in stocks and stock market volatility in OECD markets. For this purpose, by using panel data of 34 OECD countries from 2000 to 2010, we estimate both a random-effects panel model and a Prais–Winsten regression with panel-corrected standard errors and autoregressive errors. The estimations document that there is a significant negative relationship between the share of pension funds assets invested in stocks and stock market volatility in OECD markets. The binary probit and logit models further validate the argument that pension funds as institutional investors can dampen stock market volatility.