The linkage between insurance activity and banking credit: Some evidence from dynamic analysis

This paper investigates the long-run and short-run linkages between insurance activity and banking credit for G-7 countries. To minimize the pretest bias and overcome the structural changes, we adopt the bootstrap Granger causality test applied to full sample and subsamples with a fixed window size. The Johansen cointegration test with GMM-IV estimator finds a long-run positive relation between the series. The full sample results of bootstrap Granger causality test show that there is predictive power from life insurance activity to banking credit only for France and Japan, while the short-run causal relationships between nonlife insurance activity and banking credit are country-specific. However, parameter stability test results suggest that the short-run results in full sample are unreliable. The results of rolling VAR models report that the causal linkages between them are time-varying across various subsamples. These findings offer some useful insights for achieving the co-evolution between insurance and banking credit markets. © 2014 Elsevier Inc. All rights reserved. ∗ Corresponding author at: Yuelu District No. 932, Lushan South Road, Changsha 410083, Hunan, PR China. Tel.: +86 136 3747 8142. E-mail addresses: [email protected] (G. Liu), [email protected] (L. He), [email protected] (Y. Yue), [email protected] (J. Wang). 1 Tel.: +86 158 7416 6076. 2 Tel.: +86 138 0841 6486. 3 Tel.: +86 135 0159 6916. http://dx.doi.org/10.1016/j.najef.2014.06.014 1062-9408/© 2014 Elsevier Inc. All rights reserved. 240 G. Liu et al. / North American Journal of Economics and Finance 29 (2014) 239–265