Pension funds, capital market development, and macroeconomic variables: Evidence from Jordan

• Published date: 01 May 2021
• Author: Demeh Daradkah,Nadia Al‐Hamdoun
• Date: 01 May 2021
• DOI: http://doi.org/10.1002/pa.2215

ACADEMIC PAPER

Pension funds, capital market development, and

macroeconomic variables: Evidence from Jordan

Demeh Daradkah | Nadia Al-Hamdoun

Department of Finance and Banking Science,

Faculty of Economics and Administrative

Sciences, Yarmouk University, Irbid, Jordan

Correspondence

Demeh Daradkah, Department of Finance and

Banking Science, Faculty of Economics and

Administrative Sciences, Yarmouk University,

P.O.Box 566, Zip Code 21163, Irbid, Jordan.

Email: dima_daradkeh@yahoo.com

This study investigates the dynamic relationship between pension funds and devel-

opment of capital market in Jordan over the period 1980–2017. Autoregressive dis-

tributed lag (ARDL) approaches for co-integration (bounds test) are employed to

achieve the objectives of the study. Using annual data, the results indicate no statisti-

cally significant relationship between pension funds and development of capital mar-

ket on the short run. However, the co-integration tests show a statistically significant

long-run equilibrium relationship between pension funds and development of capital

market regardless of whether capital market development was measured by market

depth or market liquidity. Moreover, the co-integration tests show a statistically sig-

nificant long-run equilibrium relationship between economic growth, and interest

rate and development of capital market regardless of whether capital market devel-

opment was measured by market depth or market liquidity. These findings have

important implications for academics, investment managers, and policy makers in

Jordan.

1|INTRODUCTION

The role of a well-developed financial system in promoting and

enhancing economic growth has been well documented in both theo-

retical and empirical literature, such as the extended work made by

King and Levine (1993), Levine (1996), Levine and Zervos (1998), and

Levine, Loayza, and Beck (2000). Therefore, a great development was

noticed in the financial market, and more specifically in the capital

market, which is motivated by globalization and liberalization

(Outreville, 2011).

Pension funds are defined as a pool of long-term financial assets,

managed by professionals' managers and owned by pension funds

members (Yermo, 2004). In other words, it is defined as long-term

institutional investors. Therefore, providing a large amount of funds

available for investment in the financial market (Horobet, Ilie, &

Joldes, 2008). Thus, it lead to a more liquid and developed capital mar-

ket (Davis, 1996; Vittas, 1998; and Blommestein, 2000). Moreover, it

stimulated economic growth (Thomas & Spataro, 2016).

Jordan is a lower middle-income country with a GDP per capita

of JD 2,830. Jordan's population reached 9,702,353 at the end of

2017, where total population between ages 0 and 14 represented

35.5% of total population, total population between ages 15 and 64

represent 60.7% of total population, and total population over 65 rep-

resent 3.8% of total population (World Bank Indicator). The Social

Security Corporation (SSC) of Jordan is considered among the largest

institutional investor in Amman Stock Exchange (ASE). Jordan is an

open and attractive economy, where foreign investor in ASE is one of

the highest in the world (Organisation for Economic Co-operation and

Development, 2006).

Pension funds' assets in Jordan have been successful in achieving

rapid economic growth between 1980 and 2017, where it has grown

from JD 4.7 million in 1980 to JD 9,702,535 in 2017. The pension

funds' assets values in 2017 were derived from 1,285,168 members

and pensioners. The pension funds' assets ratio to GDP in Jordan

shows an increasing trend between 1980 and 2017, this value rose

from 0.40% of GDP in 1980 to 34% of GDP in 2017. Moreover, the

investment assets allocation of SSC in Jordan indicated that 22.7%

was invested in stocks, 6.3 and 10.4% were invested in real estate

and deposits at banks, respectively. Thus, most of the funds were

Note: This paper is based on the Master's Thesis of the second author, where it has been

substantially revised and expanded with new contributions.

Received: 3 October 2019 Revised: 8 May 2020 Accepted: 2 June 2020

DOI: 10.1002/pa.2215

J Public Affairs. 2021;21:e2215. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of7

https://doi.org/10.1002/pa.2215