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The Role of Pension Funds in the Development of Capital Markets in Latin America Open Access

Over the past two decades, Latin America has stood out as one of the regions with most promising economic fundamentals and potential among emerging markets. Nonetheless, its track record of economic development has lagged in comparison to other developing economies – especially in the Asia-Pacific region – which points to, among various issues, to an underdevelopment of stable and widespread capital markets. The increasing incorporation of capital markets into financial systems historically dominated by banking systems in Latin America facilitates the process of raising and allocating capital while minimizing transaction costs, mitigating risk through diversification, and improving accessibility to economic actors. This paper analyzes the role of pension funds in the development of capital markets in Latin America as both financial intermediaries and institutional investors with distinguishing characteristics and advantages. I use a series of ordinary least squares regressions to test the effect of the growth on pension fund assets in the growth of stock and bond markets while controlling for entity and time fixed effects, and macroeconomic and demographic factors. The results are both positive and statistically significant for both sets of regressions, despite the differing country-specific circumstances. I conclude that the constructive role of pension funds in Latin American capital markets can promote the enhancement of financial systems overall and contribute to the efficient and equitable economic development of countries across the region. Further, I suggest policies that could be implemented to achieve these objectives.

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