Ec4024 2009 Lecture 17: The ECB and Investor Behaviour
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THE ECB & INVESTOR BEHAVIOUR Financial Economics Lecture 17 Dr Stephen Kinsella [email protected] stephenkinsella.net
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A lecture on the interaction between the European Central Bank and large, liquid markets like the Pensions markets in the OECD.
Transcript of Ec4024 2009 Lecture 17: The ECB and Investor Behaviour
LAST TIMECDO/CDS/Rating Agencies, Subprime & IrelandSecuritization drove irresponsible investor behaviour
TODAY ECB’s behaviour changes investor behaviour.
Understanding this is crucial
NEWSIreland, inc. through NTMA issued 3.7bn of bonds last week, all
went well. Great sign, see http://tinyurl.com/c3lawj
ECB Interest Rate Cut
FUNCTIONS OF THE ECB
Control Inflation
Liquidity?
Financial Stability
Monetary Policy (OMO, Q. Easing, Mon. Easing. etc)
FUNCTIONS OF INVESTORS
Pension funds and financial markets
Financial Markets as Information Provider for Central Banks
Financial Markets and the Transmission of Monetary Policy
PENSIONS
What are they?
Why do they matter? Age/Dependency Ratio
Inflation & Nominal Values
Institutional Investors -> Deep, Liquid Markets
Tied to stock markets. Mkts fall, pension values do too.
Pensions are BIG business.
HOW BIG?OECD Pensions: 20 Trillion in 2006.
The average growth rate of OECD private pension assets between 2001 and 2007 was 9.4%.
USD 28 trillion in assets (111% of GDP on average) were accumulated in pension funds (64% of the total),
Retirement savings accounts managed by banks or investment companies (18% of the total),
Private pension insurance contracts (16% of the total),
More than 60% of the total OECD private pension assets were held by the US system (USD 17 trillion). By October 2008, total OECD private pension assets were down to about US 23 trillion, or about 90% of the OECD’s GDP.
OK, SO PENSIONS ARE VERY BIG.
WHY DO THEY MATTER?
PENSIONS & MONETARY POLICY
• Pension funds are stable long-term investors with sophisticated investment strategies
• implies they play an important role in the shaping of the financial market.
• But: double edged sword
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Nominal and real pension fund returns in OECD countries, January-October 2008
Real Nominal
Structure of assets of pension funds in selected OECD countries 2001-2006
PENSIONS & IRISH FISCAL POLICY
• NPRS now used as slush fund, exactly what the experts told us not to do (Lane, 2000, Honohan, 2000).
• Double Edged sword of Irish Pension funds
NEXT TIME
• Behavioural Finance 1: CAPM and Reality. Reading: course notes on site.
