Investment Risk Taking by Institutional Investors

26 Pages Posted: 1 Nov 2011 Last revised: 5 Jan 2012

See all articles by Janko Gorter

Janko Gorter

Dutch Central Bank (DNB)

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 30, 2011

Abstract

According to theory, institutional investors face both risk management and risk shifting incentives. This paper assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995-2009. Using a unique and extended dataset, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk management incentives dominate in the Dutch insurance industry. Risk shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds we conclude that, on average, neither risk shifting nor risk management incentives are dominant. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized.

Keywords: Portfolio Choice, Insurance Companies, Pension Funds, Ownership Structure

JEL Classification: G11, G22, G23, G32

Suggested Citation

Gorter, Janko and Bikker, Jacob Antoon, Investment Risk Taking by Institutional Investors (August 30, 2011). De Nederlandsche Bank Working Paper No. 294, Available at SSRN: https://ssrn.com/abstract=1951835 or http://dx.doi.org/10.2139/ssrn.1951835

Janko Gorter (Contact Author)

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands
+31 20 524 34 97 (Phone)

Jacob Antoon Bikker

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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