Pension Fund Managers Behavior in the Foreign Exchange Market

The effects of the Pension Fund Managers (PFMs) behavior on the foreign exchange market may be important, given the increasing size of their portfolio and their possible market power. Some authors argue that when big investors like PFMs trade large volumes in the foreign exchange market, they may influence other agents’ decisions, increasing the impact of the PFMs’ actions on the exchange rate. However, when PFMs have market power, they will take into account their influence on the exchange rate and will moderate their trading volume. Hence, there might be a mitigating effect that reduces the pressure on the exchange rate. This paper seeks to demonstrate the existence of this effect under different theoretical foreign exchange market structures.

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