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Regime-Switching in the Volatility of Mexican Pension Fund Returns

In: Economic Challenges of Pension Systems

Author

Listed:
  • Francisco López-Herrera

    (Universidad Nacional Autónoma de México (UNAM))

  • Marissa R. Martínez-Preece

    (Universidad Autónoma Metropolitana-Azcapotzalco)

  • Roberto Joaquín Santillán-Salgado

    (EGADE Business School)

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.

Suggested Citation

  • Francisco López-Herrera & Marissa R. Martínez-Preece & Roberto Joaquín Santillán-Salgado, 2020. "Regime-Switching in the Volatility of Mexican Pension Fund Returns," Springer Books, in: Marta Peris-Ortiz & José Álvarez-García & Inmaculada Domínguez-Fabián & Pierre Devolder (ed.), Economic Challenges of Pension Systems, chapter 0, pages 397-425, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-37912-4_18
    DOI: 10.1007/978-3-030-37912-4_18
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