THE ECB &
INVESTOR
BEHAVIOUR
Financial Economics Lecture 17
Dr Stephen Kinsella
stephen.kinsella@ul.ie
stephenkinsella.net

LAST TIME
CDO/CDS/Rating Agencies, Subprime & Ireland
Securitization drove irresponsible investor behaviour

TODAY
ECB’s behaviour changes investor behaviour.
Understanding this is crucial

NEWS
Ireland, 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
• Pensionfunds 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

Nominal and real pension fund returns in OECD countries, January-October 2008
10
0
-10
-20
Real Nominal
-30
-40
Ireland
Turkey
Greece (2)
Hungary
OECD average
Netherlands
Norway
Portugal
Spain (2)
Mexico (5)

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
• BehaviouralFinance 1: CAPM and Reality. Reading: course
notes on site.