The Effects of Business Uncertainty on Investment Policies of Financial Intermediaries

Abstract

In this paper I tested the effects that the business environment uncertainty has on the investment decisions of companies within financial industry. More specifically I tried to determine the effects of either high or low volatility of business environment on investment policies of financial intermediaries, such as banks, pension funds and insurance companies. As the results of two demonstrative examples indicate increasing the volatility of future losses/payments (e.g. future losses for insurance company and payments into a pension fund) of the financial intermediary results in a more risky investment strategy even under a very risk averse optimization criterion. This could indicate that small companies, which have in general a higher coefficient of variation of payments/losses than bigger companies, should hold more risky asset. Key words: economic organization, banking&insurance, optimal portfolio allocation