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Portfolio similarity and asset liquidation in the insurance industry

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  • Girardi, Giulio
  • Hanley, Kathleen Weiss
  • Nikolova, Stanislava
  • Pelizzon, Loriana
  • Getmansky, Mila

Abstract

An important assumption underlying the designation of some insurers as systemically important is that their overlapping portfolio holdings can result in common selling. We measure the overlap in holdings using cosine similarity, and show that insurers with more similar portfolios have larger subsequent common sales. This relationship can be magnified for some insurers when they are regulatory capital constrained or markets are under stress. When faced with an exogenous liquidity shock, insurers with greater portfolio similarity have even larger common sales that impact prices. Our measure can be used by regulators to predict which institutions may contribute most to financial instability through the asset liquidation channel of risk transmission.

Suggested Citation

  • Girardi, Giulio & Hanley, Kathleen Weiss & Nikolova, Stanislava & Pelizzon, Loriana & Getmansky, Mila, 2018. "Portfolio similarity and asset liquidation in the insurance industry," SAFE Working Paper Series 224, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:224
    DOI: 10.2139/ssrn.3239362
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    More about this item

    Keywords

    Interconnectedness; Asset Liquidation; Similarity; Financial Stability; Insurance Companies; SIFI;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services

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