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Reaching for Yield in the Bond Market

Author

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  • BO BECKER
  • VICTORIA IVASHINA

Abstract

type="main"> This paper studies reaching for yield—investors’ propensity to buy riskier assets to achieve higher yields—in the corporate bond market. We show that insurance companies reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirements, insurance firms prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior is related to the business cycle being most pronounced during economic expansions. It is also characteristic of firms with poor corporate governance and for which the regulatory capital requirement is more binding.

Suggested Citation

  • Bo Becker & Victoria Ivashina, 2015. "Reaching for Yield in the Bond Market," Journal of Finance, American Finance Association, vol. 70(5), pages 1863-1902, October.
  • Handle: RePEc:bla:jfinan:v:70:y:2015:i:5:p:1863-1902
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    File URL: http://hdl.handle.net/10.1111/jofi.12199
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    References listed on IDEAS

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    1. Dion Bongaerts & Frank De Jong & Joost Driessen, 2011. "Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 66(1), pages 203-240, February.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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