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Risk Overhang and Market Behavior

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  • Gron, Anne
  • Winton, Andrew

Abstract

We show that exposure from past business transactions risk overhang can reduce activity in related business lines, sometimes to the point where no new trade occurs. Our primary focus is the nonlife-insurance market, where our model predicts that the relative impact, duration, and character of supply disruptions are related to the extent of overhang. These predictions are consistent with differences between the mid-1980s liability-insurance crisis and the early-1990s catastrophe-reinsurance crisis. We also discuss applications of our overhang model to disruptions in lending and securities markets. Copyright 2001 by University of Chicago Press.

Suggested Citation

  • Gron, Anne & Winton, Andrew, 2001. "Risk Overhang and Market Behavior," The Journal of Business, University of Chicago Press, vol. 74(4), pages 591-612, October.
  • Handle: RePEc:ucp:jnlbus:v:74:y:2001:i:4:p:591-612
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    Cited by:

    1. Ning Wang & Yiling Deng, 2016. "Market responses to loss shocks and insurers' post-catastrophe performance in the US property-casualty insurance market," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(3), pages 231-246.
    2. Harrington, Scott E. & Danzon, Patricia M. & Epstein, Andrew J., 2008. ""Crises" in medical malpractice insurance: Evidence of excessive price-cutting in the preceding soft market," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 157-169, January.
    3. Robert DeYoung & Anne Gron & Andrew Winton, 2005. "Risk overhang and loan portfolio decisions," Working Paper Series WP-05-04, Federal Reserve Bank of Chicago.
    4. Beatty, Anne & Gron, Anne & Jorgensen, Bjorn, 2005. "Corporate risk management: evidence from product liability," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 152-178, April.
    5. Gibson, Rajna & Habib, Michel A. & Ziegler, Alexandre, 2014. "Reinsurance or securitization: The case of natural catastrophe risk," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 79-100.
    6. Faith R. Neale & Kevin L. Eastman & Pamela Peterson Drake, 2009. "Dynamics of the Market for Medical Malpractice Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 221-247.
    7. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    8. Eric Park & Rui Yao, 2016. "Financial Risk Attitude and Behavior: Do Planners Help Increase Consistency?," Journal of Family and Economic Issues, Springer, vol. 37(4), pages 624-638, December.
    9. Marc G├╝rtler & Martin Hibbeln & Christine Winkelvos, 2016. "The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(3), pages 579-612, September.
    10. Jiang, Shi-jie & Nieh, Chien-Chung, 2012. "Dynamics of underwriting profits: Evidence from the U.S. insurance market," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 1-15.

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