Description

Pension fund asset allocation in many countries has become increasingly influenced by financial advisory firms, whose recommendations often elicit a large, coordinated portfolio reallocation of pension fund holdings across asset classes. Using a proprietary database, we analyse if portfolio asset reallocations in the Chilean pension fund industry act as a mechanism for exerting price pressures in the Chilean peso FOREX market. We document significant price pressure and enhanced volatility in the nominal exchange rate surrounding pension fund transactions initiated by pension fund investors following financial advisory firm recommendations. We provide evidence that certain institutions participating in the FOREX market may seek to exploit the anticipated portfolio adjustments following such recommendations by front-running pension fund trades. The potential for financial asset market volatility and market instability this activity creates has regulatory and policy implications.