Contractual Savings, Stock, and Asset Markets
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 capita...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/11/748749/contractual-savings-stock-asset-markets http://hdl.handle.net/10986/19779 |
| Summary: | 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 present a 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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