increase (decrease) as funds become less risky (i.e., when one moves from Fund A towards Fund E).<sup>28,29</sup>

# **3. Data**

The data used in this paper were obtained from the Superintendency of Pensions of Chile ( _Superintendencia de Pensiones, SP_ ) and consist of two datasets, containing information on holdings and on returns. When combined, we obtain a panel of all the portfolio investments of PFAs in operation, for each of their funds, during the period 1996-2005 at a monthly frequency, including information on returns.

The holdings dataset is structured as a panel with data on the price and quantity for every security held, by fund, per unit of time. We define a fund as a pair PFA/fund type (e.g., Fund C of PFA _Aporta_ configures a single fund). After cleaning this dataset (one percent of observations were dropped from the original dataset), there are 7,501,210 observations, representing all securities held during each month by at least one fund. The dataset contains information on the holdings of 104,789 different securities, for up to 57 funds, at a monthly frequency from July 1996 to December 2005.

The data on returns consist of a panel containing a time series for the price, returns, dividends, and term to maturity (available depending on the nature of the asset) of each instrument. After the cleaning process, the dataset contains 5,467,959 observations from July 1996 to December 2005 (0.1 percent of observations were dropped from the original dataset).<sup>30</sup> 28 Fund A is the riskiest fund, having the lowest (highest) limits on domestic fixed-income (variableincome) instruments across the five funds. Fund E is the most conservative fund, having the highest limits on fixed-income instruments, the only instruments in which its assets are allowed to be invested. Limits on shares of domestic mutual funds are the same (five percent) for Funds A, B, and C, but the aggregate limit for shares of domestic mutual and investment funds gradually decreases – from 40 percent (Fund A) to 20 percent (Fund B) to ten percent (Fund C). For foreign investments, the limit is set at the PFA level and was relaxed twice during 2003 (becoming effective in May 2003 and March 2004). The maximum allowed by law is 30 percent of the value of all funds managed by a single PFA.

29 Regarding limits for specific instruments, two of them address instruments that do not require the approval from the Risk-Rating Commission ( _Comisión Clasificadora de Riesgo_ , CCR) approval. For corporate stocks and shares of mutual and investment funds that do not require the CCR’s approval, pension funds can invest either three percent (Funds A and B) or one percent (Funds C and D) of their assets. For foreign investments and other publicly traded securities that do not need such approval, the investment limit as a share of the pension fund’s assets is one percent for Funds A, B, C, and D.

> 30 Due to the lack of dividend information in our dataset for the year 2000, all the calculations presented in the paper are carried out using a measure of returns that does not include dividend information. Some estimates were computed with dividend information obtaining similar results.

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