NATIONAL BANK OF POLAND WORKING PAPER No. 120

Transcription

1 NATIONAL BANK OF POLAND WORKING PAPER No. 120 Large capial inflows and sock reurns in a hin marke Janusz Brzeszczyński, Marin T. Bohl, Dobromił Serwa Warsaw 2012

2 Acknowledgemens: We would like o hank Ludwig Chincarini, Tim Vinaimon, Marha O Hagan-Luff, David Cobham, Jacques Meliz, Maeusz Pipień, Mark Schaffer, he paricipans of he 86h Annual Conference of he Wesern Economic Associaion Inernaional (WEAI) in San Diego on June 29 July 3, 2011, he 9h INFINITI Conference on Inernaional Finance a Triniy College in Dublin on June 13 14, 2011 and he paricipans of he research seminar a Herio-Wa Universiy for helpful commens on his and earlier versions of his paper. Dobromił Serwa hanks Pior Szpunar, Mara Gołajewska and colleagues from he Financial Sysem Deparmen of he Naional Bank of Poland for advice and suppor. Janusz Brzeszczyński (corresponding auhor) Deparmen of Accounancy, Economics and Finance, Herio-Wa Universiy, Edinburgh, Unied Kingdom, el.: ; fax: ; j.brzeszczynski@hw.ac.uk. Marin T. Bohl Wesfälische Wilhelms Universiy, Münser, Germany Dobromił Serwa Naional Bank of Poland, Warsaw, Poland and Warsaw School of Economics, Warsaw, Poland Design: Oliwka s.c. Layou and prin: NBP Prinshop Published by: Naional Bank of Poland Educaion and Publishing Deparmen Warszawa, 11/21 Święokrzyska Sree phone: , fax Copyrigh by he Naional Bank of Poland, 2012 ISSN X hp://

3 Conens CONTENTS I. INTRODUCTION 3 II. STOCK MARKET AND PENSION SYSTEM REFORM IN POLAND 8 III. DATA AND METHODOLOGY 11 IV. EMPIRICAL RESULTS 17 V. COUNTERFACTUAL ANALYSIS AND TRADING STRATEGY OUT-OF-SAMPLE 24 VI. CONCLUSIONS 28 REFERENCES 29 TABLES AND FIGURES 32 1 WORKING PAPER No

4 Absrac ABSTRACT: Using unique daa abou capial flows o privae pension funds in Poland, we find ha heir impac, as a group of large insiuional invesors, on sock reurns is saisically significan in shor-erm bu no such effec exiss in he long-run. We analyze he capial ransfers, in form of he aggregaed pension conribuions colleced from all employees in he enire Polish economy, from he public social securiy insiue ZUS in Poland o he privae pension funds, which furher inves his capial on he sock marke. The average ime for he subsequen reacion of sock prices is found o be 4 days. JEL: G23, G15 Keywords: Insiuional Invesors, Sock Marke Reurns, Pension Funds, Capial Flows. 2 2 N a i o n a l B a n k o f P o l a n d

5 herein. 1 The specific hisory of he Polish sock marke provides a unique insiuional feaure and Inroducion I. INTRODUCTION Large insiuional invesors, such as pension funds, which generae inensive capial flows are likely o have subsanial impac on sock prices. This effec should, by naure, be more visible and more srongly pronounced in hinly raded markes, which are characerized by relaively low volume of ransacions, low capializaion and low liquidiy comparing wih he amouns of capial being injeced on regular basis by hese large insiuions. On he oher hand, i is known ha he number of insiuional invesors rading on sock markes world-wide increased subsanially in he pas wo decades, which has caused a gradually inensified ineres among financial economiss, praciioners as well as financial markes regulaors in he issue of he impac of hose insiuions on sock prices. I is widely believed ha insiuional raders have direc influence on sock reurns and he exising empirical evidence from inernaional markes backs his conjecure, as repored by Kraus and Soll (1972), Chan and Lakonishok (1993), Bikker, Spierdijk and van der Sluis (2007), Rakowski and Wang (2009) and recenly Foser, Gallagher and Looi (2011) and references 1 opporuniy allowing us o conribue o he lieraure on he insiuional invesors impac on sock prices, arising from he pension sysem reform in Poland in 1999, when privaely managed pension funds (OFEs) were esablished and allowed o inves on he capial marke. We sudy his impac and focus on he reurns dynamics of he Warsaw Sock Exchange (WSE) blue chip socks index WIG20 afer he firs ransfer of money o he pension funds on May 19, 1999 unil he end of The appearance of large insiuional raders and he resuling increase in insiuional ownership allows us o invesigae he impac hey have on sock reurns. We disinguish beween he effec of global facor from inernaional markes and he local facor relaed o he insiuional demand generaed by he capial accumulaed from he pension 1 More evidence on insiuions rading behaviour, in paricular heir impac on volailiy, auocorrelaion and he issue of sabilizaion / desabilizaion of sock prices, can be found in earlier lieraure in, for example, Lakonishok, Shleifer and Vishny (1992), Grinbla, Timan and Wermers (1995), Sias and Sarks (1997), Nofsinger and Sias (1999), Wermers (1999), Dennis and Weson (2001), Sias, Sarks and Timan (2001), Badrinah and Wahal (2002), Cohen, Gompers and Vuoleenaho (2002), Dennis and Srickland (2002) and Griffin, Harris and Topaloglu (2003), among ohers, and more recenly in Schuppli and Bohl (2010). 3 WORKING PAPER No

6 Inroducion 1 conribuions. Moreover, we also analyze he impac of ZUS ransfers on he reurns of he Polish marke WIG20 index from he perspecive of four frequencies of daa: quarerly, monhly, weekly and daily in order o examine no only he effec of hose capial flows on sock prices bu also o invesigae, more specifically, he paern of propagaion of heir impac across ime. There exiss evidence for he Polish marke abou he sabilizing effec of pension funds, as a group of large insiuional invesors, on sock prices volailiy, provided in Bohl and Brzeszczynski (2006) and Bohl, Brzeszczynski and Wilfling (2009). There is, however, raher limied research and very lile empirical evidence available on he direc impac of rades performed by insiuional invesors on sock marke reurns in emerging and hinly raded markes, excep ha repored in Zalewska (2006). We conribue o filling his niche by using unique daa abou acual ransfers of capial from he pension insiue (ZUS), colleced cenrally from all employees in Poland, o privae pension funds, which inves i in he financial marke. Even hough he previous sudies on he role of pension funds, as a group of very large insiuional invesors, and he Polish marke and are very limied and provide only scarce evidence abou heir impac on he movemen of sock prices, his issue has been ofen discussed in popular business and financial press in Poland. For example, Rzeczpospolia, a major Polish business and financial daily newspaper, repored ha afer he enrance of large pension funds he liquidiy of he Polish marke has become oo low relaive o he amouns of capial hey managed and invesed in socks. There exiss also anecdoal evidence in form of sories abou sock marke invesors who have achieved very high reurns by implemening a simple sraegy relying on he analysis of ransacions of large pension funds and predicing which socks hese insiuional invesors may favour in he fuure (Rzeczpospolia, 2002). The problem of such high and regular capial flows, generaed by large insiuional invesors, as well as, addiionally, he limied liquidiy of he Polish sock marke provide a moivaion for his sudy. The empirical resuls obained in his invesigaion allow us o conclude abou he direc impac of pension funds on he movemen of sock prices a he WSE. The exising lieraure relaed o his sudy and based on daa from inernaional markes presens differen ypes of evidence abou he impac of insiuional rading on asse prices. Chan and Lakonishok (1993) analyzed he price impac of insiuional rades using he daa from 37 large money managemen firms from he years They documened an immediae impac of ransacions on sock price changes even afer conrolling for marke-wide sock price 4 4 N a i o n a l B a n k o f P o l a n d

7 Inroducion movemens. Inernaional evidence on he impac of insiuional rading on sock prices is provided also by Domowiz, Glen, and Madhavan (2001), and Chiyachanana, Jain, Jiang, and Wood (2004) among ohers. Furhermore, Kraus and Soll (1972) and Chan and Lakonishok (1993) documen asymmeric effecs beween he price impac of buy and sell orders. Several sudies found ha buys have larger price impac han sells. Holhausen, Lefwich and Mayers (1987) argue ha price effecs are predominanly emporary for seller-iniiaed ransacions and permanen for buyer-iniiaed ransacions on he New York Sock Exchange. According o Keim and Madhavan (1996) he buyer-iniiaed ransacions are more ofen informaion-based han sell ransacions, which in urn are more ofen liquidiy-moivaed han buy ransacions. While buys are driven by he preference o hold some specific socks and herefore hey may se new higher values for heir prices, he liquidiy-driven sells do no change he prices, a leas no permanenly. Saar (2001) developed he heoreical model, where he hisory of price performance of socks affecs he degree of asymmery beween he price impac of buys and sells. Longer bull marke periods decrease he asymmery, or even reverse i, and longer episodes of price depreciaion increase he asymmery. Chiyachanana, Jain, Jiang, and Wood (2004) invesigaed he price effecs of insiuional rading in inernaional socks from 37 counries in he period from 1997 o 2001 and found ha he asymmery of he price impac depends on marke condiions: buys have a larger effec on prices during bull marke periods and he impac of sells is sronger during bear marke periods. Chiyachanana, Jain, Jiang, and Wood (2004) argue ha i is easy o sell a sock in a bull marke, when many raders are willing o buy. Similarly, i is easy o find a seller of a sock in a bear marke. Bikker, Spierdijk, and van der Sluis (2007) analyzed he impac of raders by ABP, he larges Duch pension fund, and found ha price effecs of buy ransacions (sell ransacions) end o be larger han hose of sells (buys) in bull (bear) markes. The overall price effecs are also moderae in comparison o similar effecs sudied earlier for oher ypes of insiuions. Bikker, Spierdijk, and van der Sluis (2007) explain his resul by he fac ha he analyzed ABP rades are generally rebalancing aciviies, no coinciding wih news-driven rades and herefore hey cause less price impac. Dasgupa, Pra and Verardo (2011) developed a heoreical model o analyze he impac of insiuional herding on asse prices. They fond ha insiuional rades in 1 5 WORKING PAPER No

8 Inroducion 1 he presence of herding posiively predic shor-erm reurns, bu negaively predic long-erm reurns. I is worhwhile o noe ha Polish marke has paricular characerisics of he emerging sock marke, which make i differen from oher, well developed and maure, sock markes. In paricular, wha has happened in Poland was he reversal of roles of individual and insiuional invesors afer he pension sysem reform in Poland in 1999, i.e. he informaional role of he insiuions relaive o individuals was principally differen before and afer he year In Poland unil he end of he 1990s, he individual invesors (privae people) consiued he majoriy of he sock marke invesors and generaed mos of he rading volume. This was due o cerain legal regulaions no allowing such insiuional invesors as pension fund o inves in socks and o he fac ha he whole capial marke iself was a he very early sage of is developmen and some insiuions (like he pension funds or oher ypes of invesmen funds) simply did no exis. The individual invesors, who dominaed he marke, were jus ordinary people who (someimes very naively) followed he news, newspaper aricles, various informaion in oher media (very ofen no professional sources, having lile o do wih he financial markes) as well as he rumours and herefore hey, as a whole group, exhibied herding behavior. Afer 1999 he pension funds enering he marke played he role of informed raders relaive o he individuals. Some evidence confirming he impac of insiuional rading on sock prices is he decrease in sock reurns volailiy afer he enrance of pension funds on he marke in Poland, as repored in Bohl and Brzeszczynski (2006) and Bohl, Brzeszczynski and Wilfling (2009). In his paper we provide more evidence abou he role of a group of large insiuional invesors (i.e. privae pension funds) on he sock marke prices, in paricular when heir impac is viewed from he perspecive of various ime horizons, such as quarerly, monhly, weekly and daily. Zalewska (2006) analyzed he long-run effecs of he pension reform in 1999 and found ha he Polish sock marke was performing worse han oher emerging markes in he region aferwards. However, Zalewska (2006) did no invesigae capial flows o he marke, as we do 2 Sias, Sarks and Timan (2001) provide he evidence ha i is he informed rading ha moves prices and i is insiuional invesors (no individuals) who are more likely o be informed han oher invesors (see also Dennis and Weson, 2001; and Kamesaka, Nofsinger and Kawakia, 2003). If his is he case, hen he enrance of pension funds in Poland in 1999 could, indeed, affec he behaviour of sock prices. 6 6 N a i o n a l B a n k o f P o l a n d

9 Inroducion in his sudy, and could no assess heir direc impac on sock prices in he shor-run or in he long-run. The remainder of he paper is organized as follows. Secion II conains a descripion of he pension sysem reform and is consequences for he invesors srucure in he sock marke in Poland. Secion III discusses he daa and mehodology. Secion IV presens empirical findings. Secion V summarizes and concludes. 1 7 WORKING PAPER No

10 Sock marke and pension sysem reform in Poland 2 II. STOCK MARKET AND PENSION SYSTEM REFORM IN POLAND Polish Sock Marke and Invesors Srucure Re-esablished in 1991, he Polish sock marke has grown rapidly during he las wo decades in erms of he number of lised companies and marke capializaion. The capializaion of Warsaw Sock Exchange (WSE) is comparable o he smaller, maure European markes, like he Ausrian or he Greek sock markes, and equals currenly abou 45 bn US dollars. The presen invesors srucure on he Polish sock marke has is origin in he pension sysem reform in he year 1999, when he public sysem was enriched by a privae componen, represened by open-end pension funds. Paricipaion in his componen, ofen called he second pillar, is mandaory for employees below cerain age. Employees are obliged o ransfer 7.3% of heir gross salary o he governmen-run social insurance insiue called Zakład Ubezpieczeń Społecznych (ZUS), which in urn ransfers he colleced conribuions o he privae pension funds OFEs. The firs ransfer of money from he ZUS o he pension funds ook place on May 19, This dae marks a significan change of he invesors srucure in he Polish sock marke. In 1999, abou 20% of he domesic insiuional invesors and 45% of he domesic individual invesors raded a he Warsaw Sock Exchange. This siuaion has nearly reversed and he number of insiuional raders approximaely doubled afer 1999 (e.g., Warsaw Sock Exchange, 2011). Consanly abou 35% of he invesors on he Polish sock marke adhere o he group of foreign invesors. While before May 19, 1999 he majoriy of raders were small, privae invesors, afer ha dae pension funds became imporan players on he sock marke in Poland. There were also some muual funds acive in he marke bu hey had relaively small amouns of capial under managemen. Moreover, he role of corporae invesors, i.e. companies invesing heir capial surpluses, was very marginal. The number of pension funds in Poland over he analyzed period of ime varied. The change in heir numbers occurred mainly due o he mergers and acquisiions of he smaller funds by he larger ones. I is imporan o noe, however, ha heir srucure as well as he srucure of he asses under heir managemen remains raher invarian. Righ afer he sar of pension sysem reform in 1999 he share of pension funds invesmens in socks was relaively very low, ypically in he range of 3% - 10% of heir oal asses, bu i soon increased o 30% in 2000 and sayed consisenly a ha level in he subsequen years. For example, in he snapsho a 8 8 N a i o n a l B a n k o f P o l a n d

11 Sock marke and pension sysem reform in Poland he end of 2003, 16 pension funds operaed in Poland wih 11.8 bn US dollars under managemen. In comparison, Polish insurance companies and muual funds had only 3 and 1 bn US dollars of asses, respecively. The pension funds invesed abou 3.8 bn US dollars in socks lised on he Warsaw Sock Exchange in ha year. A he end of 2009 he oal porfolio of hese pension funds was almos six fold larger: 62.8 bn US dollars including he 18.7 bn US dollars invesed in shares on he Warsaw Sock Exchange. The share of pension funds in he Warsaw Sock Exchange urnover reached is maximum level in he years 2002 and 2003, i.e. 13.6% and 10.1% of average daily urnover, respecively. Taking ino accoun only he free floaing socks, his share was even larger, 21.7% and 23.2%, respecively. In he nex years, he share of pension funds in he Warsaw Sock Exchange urnover has been seadily decreasing and has flucuaed around he 5% level since More imporanly, he share in he urnover of free floaing socks has had a posiive rend and reached he level of 30.4% in 2009, as repored by Naional Bank of Poland (2004; 2011). The sock holdings of pension funds predominanly consis of large capializaion socks ha are lised in he blue-chip index WIG20 and usually belong o he larges ones in heir indusries. Therefore, pension funds have emerged as imporan players on he Polish sock marke wih he amouns of capial capable o affec sock prices. 2 Origins and Implemenaion of he Pension Sysem Reform Through he enire 1990s all he consecuive governmens in Poland, regardless of he poliical orienaion, were aware of he necessiy of pension sysem reform and hey openly ariculaed i. I has been becoming increasingly apparen ha he old pension sysem, inheried from he cenrally planned economy overhrown in 1989, was going o bankrup, as evidenced by, for example, Superinendency of Pension Funds (2000, 6-13). As a resul of he pensions reform in he year 1999, he hree pillars sysem has been inroduced, where he firs pillar is a sae pension (paid o every ciizen, however in very small amouns), he second pillar are he privae pension funds OFEs (wih compulsory paricipaion for people below cerain age) and he hird pillar are oher privae invesmen funds (wih volunary paricipaion). Despie he poliical discussions, he new sysem sared o operae in May New pension funds received a lo of media aenion and posiive publiciy righ from he sar in WORKING PAPER No

12 Sock marke and pension sysem reform in Poland 2 (e.g. Rzeczpospolia, 1999), however he implemenaion of he reform raised new concern conneced wih he concenraion of capial in he pension funds indusry and he sock marke liquidiy. Firs, since he sar of he reform he number of funds has been decreasing because of mergers and acquisiions. In consequence, more of he fresh capial has been accumulaing in a smaller number of pension funds. Second, he pension funds - forced by law o inves mainly in he domesic marke joinly gained significan conrol in he public companies quoed a he Warsaw Sock Exchange. In some cases he cumulaed share of all pension funds in a single company exceeded 25%. Taking ino accoun a limied number of socks a he Warsaw Sock Exchange and a small number of new issues on he one hand and he rapidly growing mass of capial in he pension funds on he oher hand, his rend was likely o be coninued. The problem of limied liquidiy of he Polish sock marke afer he new pension funds sared heir invesmens and have been accumulaing increasingly higher amouns of capial from employees pension conribuions has been repored by major Polish business and financial newspapers and magazines (e.g. Rzeczpospolia, 2002). 3 The issue of oo srong concenraion of pension funds indusry creaing he risk of damaging he compeiion beween hem has also been ofen discussed in popular business and financial press in Poland already afer he sar of he pension sysem reform (e.g. Rzeczpospolia, 2001). 3 A he sar of he reform in he lae 1999s his siuaion may have had following wo serious implicaions for sock marke in Poland: (1) pension funds could collecively execue heir righs as shareholders in he public companies by appoining members of supervisory boards, hus gaining more conrol over hese firms and possibly causing such hreas as manipulaion of he informaion from he companies (and manipulaion of heir prices a he sock exchange) and (2) pension funds could have oo srong impac on he sock marke because he amoun of capial hey had under managemen was oo high and gave hem power o move prices in he marke characerized by relaively low liquidiy. One of he possibiliies his effec migh have is riggering volailiy and desabilizing sock marke (however evidence abou he opposie effec of an impac of insiuional invesors in Poland on sock prices volailiy was presened in, e.g., Bohl and Brzeszczynski, 2006, and Bohl, Brzeszczynski and Wilfling, 2009) N a i o n a l B a n k o f P o l a n d

13 Daa and mehodology III. DATA AND METHODOLOGY Daa In his invesigaion we use unique daabase composed of very deailed daa abou he ransfers from he public pension funds insiue Zakład Ubezpieczeń Społecznych (ZUS) in Poland (Social Securiy Insiue) o he privae pension funds OFEs, which inves his capial on he sock marke and on oher financial markes. The daa was obained direcly from he ZUS. We also use he daa abou he prices and reurns of he blue-chip sock index of he Warsaw Sock Exchange (WSE) he WIG20 index and he Dow Jones Indusrial Average (DJIA) index from he New York Sock Exchange (NYSE). The laer is assumed o represen he movemens of he global sock marke and is used as a conrol variable ha allows us o exrac he effec of he local facor (capial from ZUS invesed in socks a he Warsaw Sock Exchange) comparing wih he effec of he influence of he global marke volailiy. The source of he WIG20 and DJIA daa is Daasream. The imporan characerisic of capial ransfers from he ZUS o he OFE pension funds as he main explanaory variable in our models is ha i does no direcly depend on any oher variable used in his invesigaion. I depends raher on he general economic siuaion, liquidiy needs and echnical procedures in he Polish social securiy insiue ZUS, and also on some macroeconomic (or even demographic) facors, such as he number of employed and reired persons, he oal value of wages and he governmen fiscal policies in he counry. The ransfers from ZUS obviously affec he value of pension funds invesmens on he sock marke, bu he ransfers hemselves are independen of he global and local financial marke condiions in conras o he invesmens of pension funds. Therefore, our proposed variable acs as a naural ool o analyze he impac of capial invesmens on sock reurns. The daa from ZUS abou he ransfers o privae pension funds spans over he period from May 1999 o December 2008 and covers a oal of 1,098 individual observaions. All ransfers are expressed in local currency (Polish zloy, PLN), similarly o WIG20 reurns. This daa sample provides unique laboraory-like condiions no only because i allows o analyze direcly he impac of ransfers from ZUS o he pension funds on he sock prices, bu also because during his period of ime he marke was compleely dominaed by domesic pension funds while foreign pension funds sared o inves in Poland only laer (Parkie, 2010). Hence, in his sudy we can exrac he effec of he impac of pension funds invesmens as a 3 11 WORKING PAPER No

14 Daa and mehodology 3 homogenous group of invesors and analyze heir impac on sock prices wihou he influence of foreign pension funds as a differen ype of insiuional invesors. ZUS ransfers variable is rending upwards over ime, which is mos likely caused by such facors as: increasing wages (boh in nominal and real erms), rising number of employees in he real economy (which overall resuls in he increasing pension conribuions) and he inflaion. In order o avoid obvious problems resuling from he use of a rending variable in our models, we de-rend i by dividing he ransfers for all daa frequencies by heir respecive moving averages, which allows us o analyze he long-run impac of pension funds invesmens on sock prices. Hence, he variable which we use as ZUS ransfers, denoed as TRANSbyMA, can be inerpreed as relaive (percenage) deviaion of ZUS capial ransfers from he long-run rend. As an addiional conrol variable we exploi he WIG20 volume of rade, which we also de-rend using he same echnique (deviaions from he moving average) as in case of he ZUS ransfers. Modeling sraegy We invesigae firs he long-erm effecs of pension funds invesmens in he sock marke in Poland and consruc he models for quarerly and monhly frequency of daa. Then we urn our aenion o he shor-erm effecs and analyze he models for weekly and daily daa frequencies. Such modeling sraegy allows us o compare he impac of he ZUS ransfers on he sock prices from various perspecives and in differen ime-horizons. There exiss broader evidence abou he impac of capial flows on sock reurns in he long-run - as documened by, for example, Bekaer, Harvey and Lumsdaine (2002), Goyal (2004) and Lou (2011) - and we invesigae wheher he flows generaed by invesmens of he group of large insiuional invesors in Poland, i.e. he privae pension funds, have similar effecs in he longer erm bu also in shorer ime periods. Models for quarerly, monhly, weekly and daily daa were consruced using he variables aggregaed o heir respecive frequencies of observaion. Addiionally, we creaed he variables ha span over he period of 2-, 3- and 4-days o invesigae he effecs of he ZUS capial flows on sock prices in he inervals longer han 1 day bu shorer han 1 week N a i o n a l B a n k o f P o l a n d

15 Daa and mehodology The quarerly / monhly / weekly / daily reurns for he WIG20 and DJIA indices were compued using he values of hose wo indices a he end of every quarer / monh / week / day (and similarly so for 2-, 3- and 4-days long inervals). The value of individual ZUS ransfers has been added wihin every quarer / monh / week ec. and divided by respecive moving averages o creae he de-rended ransfers variable: TRANSbyMA. The same echnique has been adoped for he WIG20 volume of rade, which has been aggregaed in a similar way and allowed us o creae he de-rended volume variable: VOLbyMA. For he quarerly daa we calculaed he deviaions of ransfers and volume from heir moving averages from he previous 4 quarers of he year. Due o he fac ha he ransfers a he very beginning of he period in he firs year in he sample (i.e. year 1999, saring in May 1999) were significanly lower han laer, we did no use his period for he measuremen of he derended ransfers (or any oher variable) and we sared our esimaion period for all models in he year The firs de-rended ransfer (TRANSbyMA) and de-rended volume (VOLbyMA) was calculaed for Q (using daa from four previous quarers from Q o Q4 2000). Similarly, we used he firs 12 monhs of he year 2000 o calculae he moving average for he de-rended ransfers and he de-rended volume for he monhly daa. For he weekly and daily daa we divided he ransfers by heir 12-week (3-monh) moving averages and he 60-day (3- monh) moving averages, respecively. Therefore, we were able o sar our esimaion sample wih daily and weekly daa already in he second quarer of he year 2000 and we se he end of he sample a December 31, The variables for a respecive daa frequency are denoed using leers q (for quarerly), m (for monhly), w (for weekly), d (for daily) and 2d, 3d and 4d (for muliple day long inervals) a he end of every variable s name. Hence, for example, he de-rended quarerly ransfers from he ZUS pensions insiue o he privae pension funds are denoed as: TRANSbyMAq and he de-rended ransfers for he monhly frequency are denoed as: TRANSbyMAm. Similarly, he names of variables for quarerly (monhly) de-rended volume of rade are: WIG20 q r and VOLbyMAq ( VOLbyMAm ) and for he quarerly (monhly) sock index reurns: r ( r DJIAq WIG20m and variables for oher daa frequencies. DJIAm r ). The same sysem has been used o creae names of all oher 3 13 WORKING PAPER No

16 Daa and mehodology 3 The variabiliy of ZUS ransfers and he WIG20 index is clearly differen during bull and bear marke periods, so in order o be able o exrac he effecs of ZUS ransfers on he WIG20 index in hose wo disinc marke phases we esimaed varians of models using hose segmened sub-samples, which allowed us o assess he impac of ransfers during he ime when he markes are characerized by a general rise or general fall of sock prices and also provides robusness check of he resuls. In our sample of 8 calendar years , he bull marke covers he period: Q Q for he quarerly daa and April 2003 June 2007 for he monhly daa while he bear marke period covers: Q Q and Q Q for he quarerly daa and January 2001 Sepember 2001 and July 2007 December 2008 for he monhly daa. For he weekly and daily models he cu-off daes are analogous o hose from he monhly daa. Any possible condiional heeroscedasiciy of residuals in empirical versions of all he models was esed using he Engle s (1982) LM muliplier es and i is subsequenly eliminaed using appropriae GARCH specificaions. Auocorrelaion, if i exised, was eliminaed by he imposiion of AR and/or MA erms. Modeling long-run and shor-run effecs of pension funds invesmens We esimaed he following models for he reurns of he WIG20 index for all analyzed frequencies of daa: r WIG20i TRANSbyMAi r VOLbyMAi (1) DJIAi where:,,,,,, dd2d3d4wmqi and q quarerly, m monhly, w weekly frequency and day4d4, day3d3, day2d2 and d denoe a he frequencies y1d for inervals of 4, 3, 2 and 1 day lengh. The reurns of he WIG20 and DJIA indices are denoed as: WIG20i r and DJIAi r, respecively, and he de-rended ZUS ransfers and he de-rended volume of rade of he WIG20 index volume as: TRANSbyMAi and frequencies i as defined and explained above. The is an error erm. VOLbyMAi, for various inervals and daa N a i o n a l B a n k o f P o l a n d

17 Daa and mehodology In addiion, we exended our analysis by checking specificaions of models wih lags of ransfers, volume and he DJIA reurns and also segmened he enire sample ino he subsamples covering bull and bear marke periods. The impac of capial injecion from ZUS ino he sock marke is expeced o be more pronounced when higher frequency daa raher han low frequency daa is used for analysis. Such an impac can be inerpreed as evidence ha he effecs of pension fund invesmen on he sock marke are shor-lived in naure and ha hey are mos likely a marke microsrucure phenomenon raher han he long-run endency affecing he developmen of he marke. For example, Zalewska (2006) suggess ha he inroducion of he pension fund invesmens on he WSE sock exchange in 1999 did no improve he long-run performance of he Polish sock marke in relaion o oher compeing markes in he region. According o he marke microsrucure heory he changes in sock prices are relaed o he mechanism of selling and buying socks. In line wih his concep, he increased supply of capial (and greaer demand for socks) usually increases he volume of long (buying) posiions relaive o shor (selling) posiions on he marke and moves he prices up. 4 Therefore, we pay paricular aenion o he analysis of shor-run impac of OFE invesmens on sock prices and we use a range of high frequencies of daa, such as daily, 2-day, 3-day, and 4-day long inervals as well as weekly changes in WIG20 and oher variables. The use of differen shor-erm frequencies is moivaed by he fac ha he observed ransfers of capial from he ZUS (and subsequenly from he OFEs) are no likely o be immediaely invesed in socks (e.g. on he same day when he ZUS ransfer o he OFE pension funds has aken place) and such process may, in fac, require a number of days. The invesmen may be posponed by he inernal decision process in individual OFE pension funds, overall principles of heir specific invesmen sraegies (e.g. gradual invesmen of large amouns of capial, such as sealh rading echniques) or oher echnical barriers. In our analysis, he lagged variables are used o conrol for he delayed impac of ransfers, while he muli-day frequencies of daa conrol for gradual capial invesmen sraegies (over a number of days). 3 4 Anoher possible channel for he ZUS ransfers o affec sock prices could be hrough he macroeconomic informaion conained in he amouns of capial invesed on he sock exchange and he iming of invesmens. For example, weaker economic condiions in he household secor could limi he capial available a ZUS and subsequenly reduce capial ransfers from ZUS hrough he OFE pension funds ino financial markes. 15 WORKING PAPER No

18 Daa and mehodology We employ he opening prices of he DJIA index o consruc a proxy for he reurns from 3 DJIA open open he world marke, i.e. he following reurn of he DJIA: r log( DJIA l DJIA 1 o ). g We use similar definiions for 2-day, 3-day, 4-day and weekly reurns of he DJIA index. In he daily and muli-daily models he ransfers variables in he muli-day models, i.e.: ZUSbyMAd (and he respecive ZUSbyMA 2d, ZUSbyMA 3d and ZUSbyMA 4d ) have been also lagged o es and check he robusness of he delay effecs beween he acual ransfer and he ime during which he capial from ZUS is invesed on he sock marke. We invesigae each model in he full sample, in he bull periods and in he bear periods N a i o n a l B a n k o f P o l a n d

19 Empirical resuls () Resuls of he long-run analysis WIG20 index IV. EMPIRICAL RESULTS Table 1 presens he esimaes of quarerly and monhly models for he reurns of he r wih he de-rended ZUS ransfers ( TRANSbyMAq ) as well as he conrol 20qW I G variables: reurns of he DJIA index ( r ) and he de-rended volume of rade ( VOLbyMAq ). DJIAq The correlaion beween TRANSbyMAq and VOLbyMAq in he whole sample is only 0.04, so here is no problem wih mulicollineariy if hose wo variables are inroduced simulaneously in one equaion. The firs imporan finding in Table 1 is ha in he enire sample of daa (specificaions of models from s1 o s4) all esimaes of he DJIAq r are posiive and significan (a he p =0.01 level) while he esimaes of he ransfers TRANSbyMAq are no significan in any specificaion of any model (wih or wihou he conrol variables), which clearly demonsraes he dominance of he global facor represened by he DJIA index and no evidence of impac of he ZUS ransfers when he enire period of analysis is aken ino accoun. The esimaion resuls pain a similar picure, when he whole period is disaggregaed ino bull and bear marke phases (specificaions of models from s5 o s8 and from s9 o s12). In boh DJIAq bull and bear marke sub-samples he esimaes of r are posiive and in all cases bu one hey are significan, which confirms very srong impac of he DJIA index in boh periods of bull and bear marke phases, however here is evidence of a sronger relaionship in he bear raher han bull marke as indicaed by higher values of parameer esimaes. I suggess ha he WIG20 is more srongly influenced by he DJIA index during he bear marke, which provides evidence of igher linkages beween Polish sock marke and he US marke (which represens here he global facor) and possibly also a sronger conagion effec relaed o he imes of he financial crises. By segmening he sample ino sub-samples of bull and bear marke phases, we can also exrac he effec of ZUS ransfers on he WIG20 index reurns when he markes are in an upward or downward rend. The resuls in Table 1 demonsrae, however, ha he esimaes of he parameers for he de-rended ransfers TRANSbyMAq in eiher he bull or in he bear marke periods are no saisically significan in he quarerly models, so hey do no have any impac on sock prices in such long horizon in any of hose wo disinc sub-periods WORKING PAPER No

20 Empirical resuls 4 Summarizing, we can conclude ha here is no evidence abou he impac of he ZUS ransfers in he quarerly models due o he lack of significance of he esimaes of he TRANSbyMAq variable (and any of is lags eiher) in he enire period and in he sub-samples of bull and bear marke phases. 5 Table 1 presens also he esimaes of monhly models for he reurns of he WIG20 index WIG20m r wih he ZUS ransfers ( ZUSbyMAm ) as explanaory variable and monhly reurns of he DJIA index ( r ) as well as he WIG20 volume of rade ( VOLbyMAm ) as a conrol variables. DJIAm The findings from monhly frequency daa are very similar o he resuls from quarerly models, where he DJIA index is he main driving force for he WIG20 index reurns. The boom panel in Table 1 shows ha all esimaes of DJIAm r are posiive and significan a he p =0.01 level for he whole sample and in boh sub-samples, bu higher esimaes have been observed in he bull marke han in he bear marke period. In summary, he evidence from quarerly and monhly models clearly indicaes ha here is no relaionship beween ZUS ransfers and he subsequen sock price changes in he long run. Capial flows do no significanly affec long-erm reurns, because he Polish financial marke is efficien enough o adjus prices in response o non-informaive (liquidiy) rades wihin jus a few days. Moreover, he flows from he ZUS o pension funds are no sufficienly srongly correlaed wih he general macroeconomic condiions o be able o affec asse prices. Finally, possible effecs could no be disinguished eiher from oher ypes of imporan economic informaion ha may have impac on asse prices. However, i canno be excluded ha hey may exiss in shorer horizons and can be idenified using models buil for higher frequency daa. We invesigae such shor erm effecs in he nex secion. Resuls of he shor-run analysis In he nex sep we analyze he impac of ZUS ransfers over much shorer horizons: i.e. over he weekly and daily ime inervals. 5 The analysis of he goodness of fi measure 2 R also reveals ha he ZUS ransfers have a poor power in explaining he reurns of he WIG20 index for he quarerly and monhly daa (bu no in higher frequency models presened and discussed in he nex secion) N a i o n a l B a n k o f P o l a n d

21 Empirical resuls Table 2 presens firs he esimaion resuls for he weekly frequency models. The reurn from he US marke ( r DJIAw ) is again he mos significan explanaory variable in all specificaions. There is also a saisically significan immediae impac of he rading volume w ( VOLbyMAw ) on he WIG20 reurns r WIG20. The mos imporan finding in Table 2 from he poin of view of he main objecive of his sudy is he posiive and saisically significan esimae of he ZUS capial ransfers variable ( TRANSbyMAw ) on he WIG20 reurns. I means ha here exiss an impac of ZUS funds being injeced by he OFE pension funds ino he sock marke. Moreover, i persiss only wihin one week s space of ime since he lagged weekly ransfer variables are no saisically significan (esimaes for furher lags han -1 are no repored in Table 2 bu are available upon reques). The posiive relaionship beween capial ransfers and WIG20 reurns is saisically significan in he full sample (bu usually no significan in he shorer bull and bear periods, however he parameer values remain consisenly always posiive here). We also invesigaed resuls from our models in hree-yearly sub-samples (consruced as a moving window) and found ha he ransfers from ZUS are posiively relaed o WIG20 reurns in all of hose sub-periods, alhough he esimaed impac is no saisically significan in some of hem. These periods can no be linked direcly o bear or bull marke phases. I is imporan o emphasize ha he evidence abou he shor-run impac of ransfers on sock prices in he weekly models is robus o adding conrol variables, as indicaed by he resuls in he subsequen columns in Table 2. Given his robus finding abou he impac of ZUS ransfers on sock prices wihin he period of one week s ime repored and discussed above, we furher invesigae shorer inervals and higher daa frequencies o provide more robusness checks and o see addiionally if his effec can be idenified more precisely over a cerain number of days wihin a week. In oher words, we exend our analysis in order o find ou how quickly (in erms of he number of days) he impac of ZUS capial injeced ino he sock marke is maerialized afer he ransfer of capial from ZUS o he OFE pension funds akes place and wheher his effec is a gradual process (e.g. due o gradual invesmens of capial or possibly because invesors inerpre news and reac o hem wih a lag) or raher a more rapid phenomenon. If he laer is he case, i should be possible o idenify such impac on a specific day (e.g. firs or second or hird or fourh day ec.) afer he ransfer from ZUS is compleed by employing lagged ransfers as explanaory 4 19 WORKING PAPER No

22 Empirical resuls 4 variables. In urn, analyzing differen frequencies of daa will help in idenifying wheher he impac is gradual in naure and if i is spread over some longer ime. 6 This invesigaion, hence, allows o answer he quesion wha is he degree of he delay beween he ransfer of capial from ZUS o he OFE privae pension funds and he lengh of ime he OFEs need, on average, o inves hose funds on he sock marke. Below we discuss esimaion resuls from models where variables are based on daa using he 4-, 3-, 2 and 1-day long inervals. The parameer esimaes from hose models are presened in furher panels in Table 2. The resuls from models using 4-day long inervals for he consrucion of all variables indicae ha in he full sample he impac of ZUS ransfers on he sock prices is even sronger han in he weekly models boh in erms of he saisical significance (he p-values are a he 0.01 level raher han 0.05 or 0.1 levels as in case of he previous, weekly frequency, models esimaes) and in erms of he magniude of he esimaed parameer (e.g versus in specificaions s3 and similarly so in oher specificaions in Table 2) which is higher by abou 50% in he 4-day inerval models in comparison wih he weekly ones. This is a very imporan finding, which shows ha he impac of ZUS ransfers is sronger wihin 4 raher han wihin 5 days long (i.e. weekly) inervals and i means ha he OFE pension funds usually inves he capial received from he ZUS in he periods of up o 4 days. This resul is also confirmed below by esimaes from higher frequency models, in paricular he daily ones, wih heir respecive lags. Table 2 illusraes also ha he impac of he ZUS ransfers is sronger during bull periods han during bear periods in all specificaions, bu he values of he relevan parameers are posiive in every case in boh sub-samples. This resul confirms he findings from earlier sudies on he impac of insiuional rades on asse prices ha he effecs of buy ransacions are sronger in bull periods, because i is easier o buy socks when ohers are selling han when ohers are also buying and moving he prices up. Buys are also driven by he preference o hold 6 Gradual invesmen of large amouns of capial by large insiuional invesors, such as he OFE pension funds in Poland, which is divided ino many ransacions ha are spread over a number of days, would be consisen wih he sealh rading effecs known in he financial markes whereas he raders do no wan o signal o he marke ha hey inend o buy or sell large quaniies of socks, so hey execue heir ransacions using smaller porions of capial and spread hem gradually over a longer inerval of ime, e.g. a week raher han a day N a i o n a l B a n k o f P o l a n d

23 Empirical resuls some specific socks and herefore hey may se new higher and permanen values for hese socks. In he full sample, he impac of he ZUS capial ransfer lagged by one period is significan and negaive, bu he cumulaed impac remains posiive in all cases. We addiionally invesigaed sub-samples of 200 observaions (consruced as a moving window) and found a significan posiive impac of capial ransfers on WIG20 during he second half of he full sample raher han during he firs half of ha sample. This resul poins o he increasing impac of rades by pension funds on sock prices, which is in line wih he increasing share of pension funds in he urnover of free floaing socks. The esimaes from models using 3-day long inervals for consrucion of all variables presened in Table 2 show, generally, ha he impac of capial ransfers is no saisically significan in mos specificaions (however he esimaes are mosly posiive ye no as consisenly so as in he previous models). Some resuls from bull and bear sub-samples indicae a negaive insananeous link beween capial flows and WIG20 reurns, bu he cumulaive impac, aking ino accoun lagged variables, is posiive. Analyzing again he sub-samples of 200 observaions (as a moving window), we find a posiive impac in mos of he sub-periods wih he excepion only of he firs 200-observaions long window. We also find ha his impac becomes he mos significan a he end of our enire 8-year sample. Similar resuls are obained from he models esimaed for he 2-day long inervals. They do no allow us o idenify any robus evidence on he impac of he ZUS capial flows on he Polish sock marke in his paricular inerval of ime. The insananeous impac is usually posiive in he full sample and in he bull sub-sample, bu i is no saisically significan in almos all of he repored specificaions. Moreover, he aggregaed lagged impac is negaive in he full sample and in he bear marke sample. Analyzing again he moving windows of 200 observaions, we find he aggregaed (insananeous and lagged) impac of capial flows o be posiive in mos cases. Finally, he las panel in Table 2, which presens esimaion resuls from daily frequency models, provides more evidence abou he lengh of delay beween he ZUS ransfers and he reacion of sock prices. The esimaes show ha in he whole sample here is no saisically significan impac of he ZUS capial flows on day, which is he day on which he ransfers from he ZUS o he OFE pension funds ake place (however, he respecive parameer esimaes 4 21 WORKING PAPER No

24 Empirical resuls 4 from all model specificaions are posiive). Hence, he resul ha he ZUS ransfers lose significance wihin he periods of ime shorer han 4 days, as already observed in he models for 3- and 2-day inervals in oher panels in Table 2, is confirmed also here using he daily models. The lags in all oher higher frequency models end o confirm he above effec as well. 7 The esimaes for lags in he models in full sample in he boom panel of Table 2 in he specificaion s4 wih all conrolling variables are posiive for all firs 3 lags (-1, -2 and -3) and he esimae is saisically significan (a he 0.1 level) only for he lag -3. This means ha up o he day -3 he impac of ZUS ransfers on sock prices is posiive and he sronges effec is deeced for lag -3. However, his posiive effec compleely disappears already in lag -4, which is consisen wih findings in Table 2 presened in panels for he weekly and for he 4-day long inervals and corresponds exacly wih he esimaes for weekly (i.e. 5-day inervals) and 4-days inervals models (c.f. he respecive specificaions in Table 2), where he sronges impac was observed for 4-day inervals raher han for he 5-day inervals, i.e. raher han wihin he enire week (his is because he lag -4 is he one which is included in he weekly inerval bu no in he 4-day inerval, which covers only days:, -1, -2 and -3). Moreover, his lagged effec is confirmed also by he esimaes of lags in 3-day inervals (showing no saisical significance of any lags) and he 2-day inervals models. The obained esimaion resuls provide evidence ha for day no saisically significan effec exiss (only excep for he specificaion s4 in he full sample, where he esimae gains significance bu only a he weak p = 0.1 level), however he lag -1 is significan (a he sronger p = 0.05 level) and also posiive (noe ha he lag -1 in he 2-day inerval models covers he lags -2 and -3 in he daily models). The esimae of he -2 lag is negaive and significan a he p = 0.05 level (again, lag -2 in he 2-day inerval models covers he lags -4 and -5 from he daily models), which is fully consisen wih he negaive and also saisically significan esimae for lag -4 in daily models. 8 7 Noe ha he respecive inervals on which he consrucion of all variables is based (i.e. he reurns of boh sock marke indices WIG20 and DJIA as well as he aggregaed ZUS capial flows and he aggregaed volume of rade) cover he following days: he weekly inervals (i.e. 5-day inervals) cover days, -1, -2, -3 and -4; he 4-day inervals cover days, -1, -2 and -3; he 3-day inervals cover days, -1 and -2; he 2-day inervals cover days and -1; and, finally, he daily inervals cover only he day. 8 The negaive and saisically significan esimae for he lag -4 in he daily models, as well as he findings for he weekly and 4-day inerval models, migh addiionally sugges ha here exiss some correcion mechanism in sock N a i o n a l B a n k o f P o l a n d

25 socks. 9 The findings from he shor-run analysis for he full sample sugges ha he main effecs Empirical resuls The resuls discussed above, in conjuncion wih he findings repored already in Table 1 and previous panels in Table 2, sugges ha he impac of he injecion of he ZUS capial ino he sock marke is spread over longer ime of approximaely 4-5 days afer he ransfer from he ZUS o he OFEs akes place and i is mos srongly marked wihin he firs 4 days. In consequence, we can conclude ha i is quie likely ha he large insiuional invesors, i.e. he OFE pension funds in Poland, engage in he sealh rading invesmen sraegies when buying of capial ransfers from he ZUS o he OFE pension funds, and subsequenly o he sock marke, are mos significan during he firs week afer he ransfer akes place. In he shorer sub-periods here is more evidence on he posiive impac of capial flows during he bull marke han he bear marke and owards he end of he sample. Finally, he resuls from shor-run analysis, using he models buil for he daily frequency daa, reveal an ineresing finding which allows us o asses quie precisely he scale of he delay, and even esimae he average lengh of ime, beween he ransfer of capial from ZUS o he OFE pension funds in Poland and is furher invesmen in he sock marke. I appears from our models ha his delay is conained wihin he 4 day long period of ime (i.e. from day -3 unil day, while on day -4 his effec already disappears), which is consisen wih he sealh rading hypohesis of sock marke invesors. This is a new resul which sheds more ligh and provides more evidence abou he rading habis of large insiuional invesors, such as large pension funds rading in a relaively small and hin marke, which has no been repored in he lieraure before. 4 prices afer he period of 4 days of consan injecion of he new capial from he ZUS by he OFE pension funds ino he sock marke (i.e. beyond he space of ime beween days -3 and ). 9 As a furher robusness check, we also normalized he variable ZUS conaining he nominal values of capial ransfers from he ZUS o he OFE pension funds by dividing i by is 60-day sample sandard deviaion. We did ha because he volailiy of he variable TRANSbyMA, used in our invesigaions, shows some downward rend for some higher frequencies of daa, namely daily, 2-day and 3-day long inervals. We found a posiive and ofen significan impac (insananeous and lagged) of he de-rended ransfers on he WIG20 reurns for daily and for he 2-day inerval models. The resuls for he 3-day inerval models were similar o hose obained and explained above using he variable TRANSbyMA. Deailed resuls are available upon reques. 23 WORKING PAPER No