The Impact of Pension Funds’ Investments on the Capital Market—The Case of Lusaka Securities Exchange

Abstract

The Lusaka Securities exchange (LuSE) is one of the developing stock markets in Africa. As of 2015 it had only 22 listed companies with the market capitalization of about 5849 million dollars. There are a number of sectors that contribute to the growth of the stock market in Zambia. This study focused on the insurance sector, the pension funds mobilized contributions from the working population and invested in various assets among them is equity. According to the pension scheme investment guidelines (2011), pension funds are mandated to invest not less than 5% but not more than 70% of their total investment in equity. Hence, one would expect pension funds to have a good effect on the Zambian capital market. However the impact cannot be conclusive without undertaking a study to assess the effect of pension funds and capital market. Therefore, this study was an attempt to investigate the long run effect of pension fund’s investment on the Lusaka securities exchange performance. The study used quarterly data for the period ranging from January 2009 to December 2015, and employ ed the cointegration and Vector Error Correction ; the results prove the existence of long run relationships between the pension funds and the market capitalization. This relationship implies that if pension funds are encouraged to invest more in equity, it will contribute to the growth of capital market, hence developing. Recommendations have been made to policy markers on how they can use the sector to improve the performance of the capital market .