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Contractual savings, stock, and asset markets

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  • Impavido, Gregorio
  • Musalem, Alberto R.

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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Bibliographic Info

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

References

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  1. Martin Feldstein, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
  2. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  3. Demirguc-Kunt, Ash & Maksimovic, Vojislav, 1996. "Stock Market Development and Financing Choices of Firms," World Bank Economic Review, World Bank Group, vol. 10(2), pages 341-69, May.
  4. 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.
  5. Jeanine Bailliu & Helmut Reisen, 1997. "Do Funded Pensions Contribute to Higher Aggregate Savings?: A Cross-Country Analysis," OECD Development Centre Working Papers 130, OECD Publishing.
  6. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
  7. 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.
  8. Feldstein, Martin, 1978. "Do private pensions increase national savings?," Journal of Public Economics, Elsevier, vol. 10(3), pages 277-293, December.
  9. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 239-53, January.
  10. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Markets, Corporate Finance, and Economic Growth: An Overview," World Bank Economic Review, World Bank Group, vol. 10(2), pages 223-39, May.
  11. 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.
  12. 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.
  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.
  14. 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.
  15. Impavido, G., 1998. "Institutional Investors, StockMarkets and Firms' Information Disclosure," The Warwick Economics Research Paper Series (TWERPS) 503, University of Warwick, Department of Economics.
  16. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, vol. 10(2), pages 323-39, May.
  17. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank.
  18. Alfredo Cuevas & G. A. Mackenzie & Philip R. Gerson, 1997. "Pension Regimes and Saving," IMF Occasional Papers 153, International Monetary Fund.
  19. 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.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Ashok Thomas & Luca Spataro, 2013. "Pension funds and Market Efficiency: A review," Discussion Papers 2013/164, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  4. Benjamin Lorent, 2008. "Raisons Fondamentales d’une Régulation Prudentielle du Secteur des Assurances," Working Papers CEB 08-020.RS, ULB -- Universite Libre de Bruxelles.
  5. World Bank, 2005. "Benin : Financial Sector Review," World Bank Other Operational Studies 8300, The World Bank.
  6. Georges de Menil, 2003. "Why should the portfolios of mandatory private pension funds be captive? (the foreign investment question)," DELTA Working Papers 2003-12, DELTA (Ecole normale supérieure).
  7. 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.
  8. 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.
  9. Claudio Raddatz & Sergio Schmukler, 2013. "Deconstructing Herding: Evidence from Pension Fund Investment Behavior," Journal of Financial Services Research, Springer, vol. 43(1), pages 99-126, February.
  10. 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.
  11. Milos Laura Raisa, 2012. "Spillover Effects Of Pension Funds On Capital Markets. The Eu-15 Countries Case," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 164-170, December.
  12. Beck, T.H.L. & Webb, I., 2003. "Economic, demographic, and institutional determinants of life insurance consumption across countries," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125512, Tilburg University.
  13. Pamela Córdova Olivera, 2010. "Contribución del sistema de pensiones privado de capitalización individual al desarrollo del mercado de capitales en Bolivia 1997-2009," Investigación & Desarrollo 0210, Universidad Privada Boliviana, revised Jan 2010.
  14. Vittas, Dimitri, 2002. "Policies to promote saving for retirement : a synthetic overview," Policy Research Working Paper Series 2801, The World Bank.
  15. 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.

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