Advertisement

Regime-Switching in the Volatility of Mexican Pension Fund Returns

  • Francisco López-HerreraEmail author
  • Marissa R. Martínez-Preece
  • Roberto Joaquín Santillán-Salgado
Chapter
  • 19 Downloads

Abstract

Several Latin American countries reformed their retirement-pension systems during the 1980s and 1990s because the previous funded or pay-as-you-go systems were deemed insufficient to support the rapidly growing aging populations. Mexico was no exception, and in 1997 it replaced its traditional pay-as-you-go system with a privately managed scheme, in which contributions by or on behalf of active workers are deposited in individual accounts and channeled to a privately managed pension fund. The main function of these private pension fund managers is to invest active workers’ contributions in financial securities portfolios to maximize returns and minimize risks, increasing the accumulation in individuals’ accounts. The defined-contribution system, as it is known, manages workers’ accumulated resources to support them upon retirement. According to government authorities, the system also has the advantage of increasing domestic savings due to the compulsory nature of workers’ savings, and investing them to foster economic growth. Since the defined-contribution system was implemented in Mexico, its investment regime has undergone several changes. At the end of 2004, a new type of basic pension fund, SIEFOREs (Sociedades de Inversion Especializadas de Fondos para el Retiro), was created, and a new 2007 amendment allowed for the creation of three new different types of pension funds designed to serve workers pertaining to different age ranges, encompassing their complete life span. This chapter analyzes the conditional volatility of SIEFOREs’ returns based on a model according to which GARCH parameters follow a two-regime Markov-chain process. Since all the available information for each SIEFORE is used, a thorough analysis is carried out, taking into account different critical facts that have influenced retirement pension fund risk. The study’s results and conclusions are useful for retirement pension fund managers, as well as for the system’s regulators and supervisors.

Keywords

Pension funds Markov-switching GARCH models Return volatility Risk returns 

References

  1. Alonso, J., Hoyo, C., & Tuesta, D. (2015). A model for the pension system in Mexico: Diagnosis and recommendations. Journal of Pension Economics and Finance, 14(1), 76–112.  https://doi.org/10.1017/S147474721400016X.CrossRefGoogle Scholar
  2. Ardia, D., Bluteau, K., Boudt, K., Catania, L., & Trottier, D-A. (2016). Markov-Switching GARCH models in R: The MSGARCH package. Allowable at SSRN: https://ssrn.com/abstract=2845809 or doi: https://doi.org/10.2139/ssrn.2845809.
  3. Barr, N., & Diamond, P. (2009). Reforming pensions: Principles, analytical errors and policy directions. International Social Security Review, 62(2), 5–29.  https://doi.org/10.1111/j.1468-246X.2009.01327.x.CrossRefGoogle Scholar
  4. Blake, D., Cairns, A. J. G., & Dowd, K. (2001). Pensionmetrics: Stochastic pension plan design and value-at-risk during the accumulation phase. Insurance: Mathematics and Economics, 29(2), 187–215.  https://doi.org/10.1016/S0167-6687(01)00082-8.CrossRefGoogle Scholar
  5. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307–327.  https://doi.org/10.1016/0304-4076(86)90063-1.CrossRefGoogle Scholar
  6. Calderón-Colín, R., Domínguez, E., & Schwartz, M. (2010). Consumer confusion: The choice of pension fund manager in Mexico. Journal of Pension Economics and Finance, 9(1), 43–74.  https://doi.org/10.1017/S1474747209004004.CrossRefGoogle Scholar
  7. De la Torre, Ó. V., Figueroa, E. G., Enciso, M. I. M. T., & Montoya, D. A. (2015). A minimum variance benchmark to measure the performance of pension funds in Mexico. Contaduría y administración UNAM, 61(3), 593–614.  https://doi.org/10.1016/j.cya.2015.05.009.CrossRefGoogle Scholar
  8. Diamond, P., & Stiglitz, J. (1974). Increases in risk and risk aversion. Journal of Economic Theory, 8, 337–360.CrossRefGoogle Scholar
  9. Espinosa-Vega, M., & Yip, C. K. (2002). Government financing in an endogenous growth model with financial market restrictions. Economic Theory, Springer; Society for the Advancement of Economic Theory (SAET), 20(2), 237–257.Google Scholar
  10. Fama, E. F. (1965). The behavior of stock-market prices. Journal of Business, 38(1), 34–105.CrossRefGoogle Scholar
  11. Fuentes, E., García-Herrero, A., & Escrivá, J. (2010). Las Reformas de los Sistemas de Pensiones en Latinoamérica. Retrieved from: http://www.bbvaresearch.com
  12. Fuentes-Castro, H. J., Coordinator. (2014). Impacto Macroeconómico de la Reforma Pensionaria en México. Instituto Tecnológico y de Estudios Superiores de Monterrey Campus Ciudad de México. Centro de Estudios Estratégicos.Google Scholar
  13. Hamilton, J. D. (1989). A new approach to the economic analysis of non-stationary time series and the business cycle. Econometrica, 57(2), 357–384.  https://doi.org/10.2307/1912559.CrossRefGoogle Scholar
  14. Hamilton, J. D. (1994). Time series analysis. Princeton: Princeton University Press.Google Scholar
  15. Haas, M., Mittnik, S., & Paolella, M. S. (2004). A new approach to Markov-switching GARCH models. Journal of Financial Econometrics, 2, 493–530.  https://doi.org/10.1093/jjfinec/nbh020.CrossRefGoogle Scholar
  16. James, E. (2005). Reforming social security: Lessons From 30 countries (No. 277). NCPA policy reports (Vol. 75251). Dallas. www.ncpa.org/pub/st/st277
  17. Martínez-Preece, M., & Venegas-Martínez, F. (2014). Análisis del Riesgo de Mercado de los Fondos de Pensión en México. Un Enfoque con Modelos Autorregresivos. Contaduría y Administración, 59(3), 165–195.  https://doi.org/10.1016/S0186-1042(14)71269-0.CrossRefGoogle Scholar
  18. Martínez-Preece, M. R., & Venegas-Martínez, F. (2015). El mercado de los fondos de pensión en México: del reparto a la capitalización. Estudios de Economía Aplicada, 33(3), 903–928. Retrieved from https://ideas.repec.org/a/lrk/eeaart/33_3_13.html
  19. Orzag, P. R., & Stiglitz, J. E. (2001). Rethinking pension reform: 10 myths about social security. In New ideas about old age security: Toward sustainable pension systems in the 21st century. Washington, DC: The World Bank.Google Scholar
  20. Peinado, P., & Serrano, F. (2014). Fiscal crisis, social security reform and vulnerable population. Panoeconomicus, 61(SPEC. ISSUE), 129–143.  https://doi.org/10.2298/PAN1401129P.CrossRefGoogle Scholar
  21. Santillán-Salgado, R. J., López, D., & Montenegro, J. (2010). Las Administradoras de Fondos de Pensiones y el Desarrollo del Mercado de Capitales en Chile. Ensayos: Revista de Economía, XXIX(2), 53–76. RePEc:ere:journl:v:xxix:y:2010:i:2:p:53-76.Google Scholar
  22. Santillán-Salgado, R. J., Martínez-Preece, M., & López-Herrera, F. (2016). Análisis Econométrico del Riesgo y Rendimiento de las SIEFORES. Revista Mexicana de Economía Y Finanzas, 11(1), 29–54.  https://doi.org/10.21919/remef.v11i1.76.CrossRefGoogle Scholar
  23. Verbič, M., & Spruk, R. (2014). Aging population and public pensions: Theory and macroeconometric evidence. Panoeconomicus, 61(3), 289–316.  https://doi.org/10.2298/PAN1403289V.CrossRefGoogle Scholar
  24. Williamson, J. B., Price, M., & Shen, C. (2012). Pension policy in China, Singapore, and South Korea: An assessment of the potential value of the notional defined contribution model. Journal of Aging Studies, 26(1), 79–89.  https://doi.org/10.1016/j.jaging.2011.08.002.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  • Francisco López-Herrera
    • 1
    Email author
  • Marissa R. Martínez-Preece
    • 2
  • Roberto Joaquín Santillán-Salgado
    • 3
  1. 1.División de Investigación de la Facultad de Contaduría y AdministraciónUniversidad Nacional Autónoma de México (UNAM)Mexico CityMexico
  2. 2.Departamento de AdministraciónUniversidad Autónoma Metropolitana-AzcapotzalcoMexico CityMexico
  3. 3.Departamento de Economía y FinanzasEGADE Business SchoolGarza GarcíaMexico

Personalised recommendations