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Contractual savings, stock, and asset markets

  • Impavido, Gregorio
  • Musalem, Alberto R.

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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  1. 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.
  2. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
  3. Alfredo Cuevas & G. A. Mackenzie & Philip R. Gerson, 1997. "Pension Regimes and Saving," IMF Occasional Papers 153, International Monetary Fund.
  4. 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.
  5. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  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 Publishing.
  7. Impavido, G., 1998. "Institutional Investors, StockMarkets and Firms' Information Disclosure," The Warwick Economics Research Paper Series (TWERPS) 503, University of Warwick, Department of Economics.
  8. Martin Feldstein, 1980. "Do Private Pensions Increase National Saving?," NBER Working Papers 0186, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. 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.
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  13. 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.
  14. Vittas, Dimitri & Skully, Michael, 1991. "Overview of contractual savings institutions," Policy Research Working Paper Series 605, The World Bank.
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  16. 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.
  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. 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.
  19. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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