By Brian Peters

This paper tests whether pension system growth mediates the relationship between demographic aging and cross-border portfolio diversification. Using a panel of up to 188 countries from 1990 to 2024, we find that demographic aging robustly predicts pension system growth (Z₁ = +69.2***, p = 0.0002, N = 1,225, 42 countries), establishing the first stage of the mediation chain. However, pension fund growth does not uniformly translate into changes in external portfolio allocation: the second stage (pension spending → gross external assets) is positive but insignificant (+6.22, p = 0.304), and the income-conditioned full-sample relationship between demographics and gross external assets is null (Z₁ = +441, p = 0.405, N = 5,583). The pension-to-diversification channel is contingent on institutional context. Two subsample findings are robust across all specifications. First, the eurozone provides the clearest case where the full mediation chain operates: the Z₁ × eurozone interaction is-385*** (p < 0.001), indicating that monetary union with free capital mobility and regulatory harmonization channels demographic pension growth into cross-border allocation. Second, low-income countries show the strongest demographic effect on external assets (Z₁ =-4,715***, p = 0.005), where institutional capacity for cross-border investment is the binding constraint. Portfolio composition effects (debt and equity levels) are null under income conditioning, rejecting a pension-theoretic debt tilt.

Source SSRN