Ec4024 2009 Lecture 17: The ECB and Investor Behaviour

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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.

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Ec4024 2009 Lecture 17: The ECB and Investor Behaviour

  1. 1. THE ECB & INVESTOR BEHAVIOUR Financial Economics Lecture 17 Dr Stephen Kinsella stephen.kinsella@ul.ie stephenkinsella.net
  2. 2. LAST TIME CDO/CDS/Rating Agencies, Subprime & Ireland Securitization drove irresponsible investor behaviour
  3. 3. TODAY ECB’s behaviour changes investor behaviour. Understanding this is crucial
  4. 4. 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
  5. 5. FUNCTIONS OF THE ECB Control Inflation Liquidity? Financial Stability Monetary Policy (OMO, Q. Easing, Mon. Easing. etc)
  6. 6. FUNCTIONS OF INVESTORS Pension funds and financial markets Financial Markets as Information Provider for Central Banks Financial Markets and the Transmission of Monetary Policy
  7. 7. 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.
  8. 8. 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.
  9. 9. OK, SO PENSIONS ARE VERY BIG. WHY DO THEY MATTER?
  10. 10. 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
  11. 11. 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)
  12. 12. Structure of assets of pension funds in selected OECD countries 2001-2006
  13. 13. 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
  14. 14. NEXT TIME • BehaviouralFinance 1: CAPM and Reality. Reading: course notes on site.

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