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

  • Kuhan Harichandra

    ()

    (National University of Singapore)

  • S. M. Thangavelu

    (National University of Singapore)

Registered author(s):

    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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    File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0405.pdf
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    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
    Contact details of provider: Web page: http://www.fas.nus.edu.sg/ecs/index.html

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    1. 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.
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