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Investment risk taking by institutional investors

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  • J. Gorter
  • J.A. Bikker

Abstract

This paper is the first that formally compares investment risk taking by pension funds and insurance firms. Using a unique and extended dataset that covers the volatile investment period 1995-2009, we find that, in the Netherlands, insurers take substantially less investment risk than pension funds, even though a market risk capital charge for insurers is yet absent. This result can be explained from financial distress costs, which only insurers face. We also find that institutional investors’ risk taking is determined by their risk bearing capacity, where this risk bearing capacity depends on capital, size, reinsurance, underwriting risk and human and financial wealth per pension plan participant. Finally, and in line with the ownership structure hypothesis, stock insurers are found to take significantly more investment risk than mutual insurers.

Suggested Citation

  • J. Gorter & J.A. Bikker, 2011. "Investment risk taking by institutional investors," Working Papers 11-11, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1111
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    References listed on IDEAS

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    Cited by:

    1. Jin Park & Tim Query, 2013. "Short-Term Equity Trading Practices Of Institutional Investors: Evidence From Property-Casualty Insurers In The United States," Economic Review: Journal of Economics and Business, University of Tuzla, Faculty of Economics, vol. 11(2), pages 3-13.
    2. Chia-Ling Ho & Gene Lai & Sangyong Han & Licheng Jin, 2022. "Organisational structure, corporate governance and reinsurance decisions in the U.S. property-liability insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(4), pages 737-784, October.
    3. Sunaryo Sunaryo & Alvia Santoni & Endri Endri & Muhammad Nusjirwan Harahap, 2020. "Determinants of Capital Adequacy Ratio for Pension Funds: A Case Study in Indonesia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 203-213, July.
    4. Hutchinson, Marion & Seamer, Michael & Chapple, Larelle (Ellie), 2015. "Institutional Investors, Risk/Performance and Corporate Governance," The International Journal of Accounting, Elsevier, vol. 50(1), pages 31-52.
    5. O. Kuzmenko, M. Kascha, 2017. "Modeling the diagnostics of bankruptcy on Ukraine's insurance market based on harmonic analysis," Economy and Forecasting, Valeriy Heyets, issue 1, pages 146-157.

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    More about this item

    Keywords

    Portfolio Choice; Insurance Companies; Pension Funds; Ownership Structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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