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Financial advisory firms, asset reallocation and price pressure in the FOREX market

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  • Francisco Pinto-Avalos
  • Michael Bowe
  • Stuart Hyde

Abstract

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 porfolio asset reallocations in the Chilean pension fund industry act as a mechanism for exerting and enhanced volatility in the nominal exchange rate surrounding pension fund transactions initiated by pension pressures in the Chilean peso FOREX market. We document significant price pressure and enhanced volatility 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.

Suggested Citation

  • Francisco Pinto-Avalos & Michael Bowe & Stuart Hyde, 2024. "Financial advisory firms, asset reallocation and price pressure in the FOREX market," Working Papers Central Bank of Chile 1020, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:1020
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    References listed on IDEAS

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    1. Luis Opazo & Claudio Raddatz & Sergio L. Schmukler, 2015. "Institutional Investors and Long-Term Investment: Evidence from Chile," The World Bank Economic Review, World Bank, vol. 29(3), pages 479-522.
    2. Neely, Christopher J., 2008. "Central bank authorities' beliefs about foreign exchange intervention," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 1-25, February.
    3. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
    4. Mozaffar Khan & Leonid Kogan & George Serafeim, 2012. "Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs," Journal of Finance, American Finance Association, vol. 67(4), pages 1371-1395, August.
    5. Raddatz, Claudio & Schmukler, Sergio L., 2008. "Pension Funds And Capital Market Development:How Much Bang For The Buck?," Policy Research Working Paper Series 4787, The World Bank.
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