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Contractual savings or stock market development - Which leads?

  • Catalan, Mario
  • Impavido, Gregorio
  • Musalem, Alberto R.

The authors study the relationship between the development of contractual savings (assets of pension funds, and life insurance companies) and non-life insurance, and, the development of stock markets (market capitalization and value traded). Their contribution lies in providing time-series evidence on a hypothesis that is very popular - but had not been substantiated - among supporters of fully funded pension systems in which funds invest large shares of their portfolios in tradable securities (equities, bonds). The literature is not clear on its assumption regarding causality between contractual savings, and capital market development. A one-way or two-way relationship is assumed, usually inter-changeably; the authors address the questions of which leads empirically. They present the evidence, including descriptive statistics, and the results of Granger causality tests, for OECD countries, and such countries as Chile, Malaysia, Singapore, South Africa, and Thailand. They do not present a theoretical framework, but do explain how the growth of the contractual savings sector, is thought to promote financial development. The authors find evidence in the data that causality between institutions, and markets either does not exist, or, if it exists, runs predominantly from institutions to markets. To a lesser extent, there is simultaneous causality between institutions, and markets. Furthermore, there is limited evidence that causality runsonly from markets to institutions (the only exception seems to be for non-life insurance in developing countries). Results seem to support the idea that the development of institutional investors, is likely to promote the growth of market capitalization, more than that of value traded. In developing countries, there seems to be no causality from pension funds to growth in value traded, while there is causality from life, and non-life insurance.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2421.

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Date of creation: 31 Aug 2000
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Handle: RePEc:wbk:wbrwps:2421
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  1. 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.
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  3. 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.
  4. John H. Boyd & Bruce D. Smith, 1996. "The co-evolution of the real and financial sectors in the growth process," Working Papers 541, Federal Reserve Bank of Minneapolis.
  5. 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.
  6. Robert Holzmann, 1997. "Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 149-178, June.
  7. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank.
  8. Martin Feldstein, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
  9. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  10. Levine, Ross & Zervos, Sara, 1996. "Stock market development and long-run growth," Policy Research Working Paper Series 1582, The World Bank.
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  12. 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.
  13. Feldstein, Martin, 1978. "Do private pensions increase national savings?," Journal of Public Economics, Elsevier, vol. 10(3), pages 277-293, December.
  14. Impavido, Gregorio & Musalem, Alberto R., 2000. "Contractual savings, stock, and asset markets," Policy Research Working Paper Series 2490, The World Bank.
  15. Asher, Mukul G., 1999. "The pension system in Singapore," Social Protection Discussion Papers 20848, The World Bank.
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  17. 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.
  18. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
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  20. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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