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Institutional Investors, Financial Sector Development And Economic Growth in OECD Countries

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  • Kuhan Harichandra

    ()
    (National University of Singapore)

  • S. M. Thangavelu

    (National University of Singapore)

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    Abstract

    This paper studies the role of institutional investors (pension fund, insurance companies and investment companies) in the development of the financial sector and economic growth in OECD countries by employing a dynamic panel VAR. While pervious studies in this area have mainly focused on contractual savings institutions of pension funds and insurance companies, we provide a consistent analysis of institutional investors that includes pension funds, insurance companies, and investment companies both at the aggregated and disaggregated levels. At the aggregate level, we found that institutional investors significantly Granger causes stock market developments and economic growth. However, we do not find such evidence with the banks. At the disaggregated level, we found that market capitalization Ganger causes the development of contractual savings institutions of pension funds and insurance companies. While these contractual savings institutions Granger causes liquidity and turnover in the stock market, the results suggest that the maturity and large coverage of these institutional investors have diluted the impact in deepening the stock market. In turn, the ‘risk averseness’ of these contractual savings institutions in holding large capitalized and diversified stock portfolio verifies the reverse causality evidence. Contrary to a passive ‘buy and hold’ strategy, the unidirection causality to both market liquidity and turnover verifies that contractual savings institutions actively manage their portfolios. Another key finding of this study is the significant role of investment companies in Granger causing both financial sector development and economic growth. While both contractual savings institutions exhibit uni -directional causality on economic growth, we found a dynamic relationship between investment companies and growth due to the risk taking activities of investment companies.

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    Bibliographic Info

    Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0405.

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    Date of creation: May 2004
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    Handle: RePEc:nus:nusewp:wp0405

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    Related research

    Keywords: Institutional Investors; Financial Sector Development; Economic Growth; Causality;

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    References

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    1. Robert Holzmann, 1996. "Pension Reform, Financial Market Development, and Economic Growth," IMF Working Papers 96/94, International Monetary Fund.
    2. Gooptu, Sudarshan, 1993. "Portfolio investment flows to emerging markets," Policy Research Working Paper Series 1117, The World Bank.
    3. Ruth A. Judson & Ann L. Owen, 1997. "Estimating dynamic panel data models: a practical guide for macroeconomists," Finance and Economics Discussion Series 1997-3, Board of Governors of the Federal Reserve System (U.S.).
    4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    5. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
    6. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    7. Philip Arestis & Panicos O. Demetriades & Kul B. Luintel, 1997. "Financial Development and Economic Growth: the Role of Stock Markets," Keele Department of Economics Discussion Papers (1995-2001) 97/05, Department of Economics, Keele University.
    8. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521818551.
    9. Impavido, Gregorio & Musalem, Alberto R., 2000. "Contractual savings, stock, and asset markets," Policy Research Working Paper Series 2490, The World Bank.
    10. Musalem, Alberto R. & Impavido, Gregorio & Tressel, Thierry, 2001. "Contractual savings, capital markets, and firms'financing choices," Policy Research Working Paper Series 2612, The World Bank.
    11. Ross Levine, 2003. "More on finance and growth: more finance, more growth?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 31-46.
    12. Arellano, Manuel, 1989. "An efficient GLS estimator of triangular models with covariance restrictions," Journal of Econometrics, Elsevier, vol. 42(2), pages 267-273, October.
    13. Steve Bond & Frank Windmeijer, 2002. "Finite sample inference for GMM estimators in linear panel data models," CeMMAP working papers CWP04/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    14. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2003. "The impact of contractual savings institutions on securities markets," Policy Research Working Paper Series 2948, The World Bank.
    15. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    16. Catalan, Mario & Impavido, Gregorio & Musalem, Alberto R., 2000. "Contractual savings or stock market development - Which leads?," Policy Research Working Paper Series 2421, The World Bank.
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    Cited by:
    1. Zalewska, Anna, 2006. "Is locking domestic funds into the local market beneficial? Evidence from the Polish pension reforms," Emerging Markets Review, Elsevier, vol. 7(4), pages 339-360, December.

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