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Contractual savings, stock, and asset markets

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Author Info
Impavido, Gregorio
Musalem, Alberto R.

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Abstract

The authors study the relationship between the development of insurance, and contractual savings, (the assets and portfolio composition of pension funds, and life and non-life insurance companies) and the development of stock markets (market capitalization and value traded). Their contribution lies in providing cross-country, and time-series on a hypothesis that is very popular - but had not been substantiated - among supporters of funded pension systems, and insurance in which reserves are largely invested in tradable securities (equities and bonds). The authors presenta three-assets model (money, quasi money, and shares) to study the effects of the development of contractual savings (pension funds and life insurance companies) and non-life insurance companies on assets market equilibrium, and on stock market development. They use an unbalanced panel of 21 OECD, and 5 developing countries, and an error components two-stage least squares (EC2SLS) estimator, including a test for endogeneity of these institutional investors. The results support the hypothesis that contractual savings, and non-life insurance companies can be treated as exogenous to the development of stock markets; that contractual savings and non-life insurance companies, as well as their portfolio policies, promote stock market development as measured by stock market capitalization, and value traded as a share of GDP. The results show that stock market capitalization is positively correlated with the return on stocks, the assets of contractual savings and non-life insurance companies, the shares of stocks in the portfolios of contractual savings and non-life insurance companies, and the value traded stocks. Stock market capitalization is negatively correlated with the real interest rate, the real return on money (measured by the inverse of inflation), and stock market volatility. Stock market value traded is positively correlated with the shares of stocks in the portfolios of contractual savings and non-life insurance companies, and the real return on money. It is negatively correlated with the real interest rate. The authors conclude that insurance and contractual savings are powerful instruments for developing stock markets, providing depth and liquidity. Higher liquidity, in turn, further promotes market capitalization.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2490.

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Date of creation: 30 Nov 2000
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Handle: RePEc:wbk:wbrwps:2490

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Related research
Keywords: Economic Theory&Research; Insurance&Risk Mitigation; Contractual Savings; Financial Intermediation; Banks&Banking Reform;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
    Other versions:
  2. Feldstein, Martin, 1978. "Do private pensions increase national savings?," Journal of Public Economics, Elsevier, vol. 10(3), pages 277-293, December. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!]
  4. Levine, Ross & Zervos, Sara, 1996. "Stock market development and long-run growth," Policy Research Working Paper Series 1582, The World Bank. [Downloadable!]
    Other versions:
  5. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank. [Downloadable!]
  6. Jeanine Bailliu & Helmut Reisen, 1997. "Do Funded Pensions Contribute to Higher Aggregate Savings?: A Cross-Country Analysis," OECD Development Centre Working Papers 130, OECD, Development Centre. [Downloadable!]
    Other versions:
  7. Munnell, Alicia H, 1976. "Private Pensions and Saving: New Evidence," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1013-32, October. [Downloadable!] (restricted)
  8. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank. [Downloadable!]
  9. Philip R. Gerson & G. A. Mackenzie & Alfredo Cuevas, 1997. "Pension Regimes and Saving," IMF Occasional Papers 153, International Monetary Fund.
  10. : Klaus Schmidt-Hebbel, 1998. "Does Pension Reform Really Spur Productivity, Saving, and Growth?," Working Papers Central Bank of Chile 33, Central Bank of Chile. [Downloadable!]
  11. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June. [Downloadable!] (restricted)
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  12. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
    Other versions:
  13. 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. [Downloadable!]
  14. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 239-53, January. [Downloadable!] (restricted)
  15. Andrew A. Samwick, 2000. "Is Pension Reform Conducive to Higher Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 264-272, May. [Downloadable!] (restricted)
  16. Hubbard, R Glenn, 1986. "Pension Wealth and Individual Saving: Some New Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(2), pages 167-78, May. [Downloadable!] (restricted)
  17. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct. [Downloadable!] (restricted)
  18. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," World Bank Economic Review, Oxford University Press, vol. 10(2), pages 223-39, May.
  19. Impavido, G., 1998. "Institutional Investors, StockMarkets and Firms' Information Disclosure," The Warwick Economics Research Paper Series (TWERPS) 503, University of Warwick, Department of Economics.
  20. Demirguc-Kunt, Ash & Maksimovic, Vojislav, 1996. "Stock Market Development and Financing Choices of Firms," World Bank Economic Review, Oxford University Press, vol. 10(2), pages 341-69, May.
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kuhan Harichandra & S. M. Thangavelu, 2004. "Institutional Investors, Financial Sector Development And Economic Growth in OECD Countries," Departmental Working Papers wp0405, National University of Singapore, Department of Economics. [Downloadable!]
  2. 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. [Downloadable!]
  3. Impavido, Gregorio & Musalem, Alberto R. & Vittas, Dimitri, 2002. "Contractual savings in countries with a small financial sector," Policy Research Working Paper Series 2841, The World Bank. [Downloadable!]
  4. Benjamin Lorent, 2008. "Raisons Fondamentales d’une Régulation Prudentielle du Secteur des Assurances," Working Papers CEB 08-020.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  5. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank. [Downloadable!]
  6. 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. [Downloadable!]
  7. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2001. "Contractual savings institutions and banks'stability and efficiency," Policy Research Working Paper Series 2751, The World Bank. [Downloadable!]
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