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Investment Commonality across Insurance Companies : Fire Sale Risk and Corporate Yield Spreads

Author

Listed:
  • Vikram Nanda
  • Wei Wu
  • Xing Zhou

Abstract

Insurance companies often follow highly correlated investment strategies. As major investors in corporate bonds, their investment commonalities subject investors to fire-sale risk when regulatory restrictions prompt widespread divestment of a bond following a rating downgrade. Reflective of fire-sale risk, clustering of insurance companies in a bond has significant explanatory power for yield spreads, controlling for liquidity, credit risk and other factors. The effect of fire-sale risk on bond yield spreads is more evident for bonds held to a greater extent by capital-constrained insurance companies, those with ratings closer to NAIC risk-categories with larger capital requirements, and during the financial crisis.

Suggested Citation

  • Vikram Nanda & Wei Wu & Xing Zhou, 2017. "Investment Commonality across Insurance Companies : Fire Sale Risk and Corporate Yield Spreads," Finance and Economics Discussion Series 2017-069, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2017-69
    DOI: 10.17016/FEDS.2017.069
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017069pap.pdf
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    References listed on IDEAS

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    Cited by:

    1. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.
    2. 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, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    Keywords

    Capital constraints ; Corporate bonds ; Credit rating ; Fire sales ; Insurance companies ; Regulation ; Yield spread;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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