Reaching for Yield in the Bond Market
Reaching-for-yield--investors' propensity to buy riskier assets in order to achieve higher yields--is believed to be an important factor contributing to the credit cycle. This paper presents a detailed study of this phenomenon in the corporate bond market. We show that insurance companies, the largest institutional holders of corporate bonds, reach for yield in choosing their investments. Consistent with lower rated bonds bearing higher capital requirement, insurance firms' prefer to hold higher rated bonds. However, conditional on credit ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. Reaching-for-yield exists both in the primary and the secondary market, and is robust to a series of bond and issuer controls, including bond liquidity and duration, and issuer fixed effects. This behavior is related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for firms with poor corporate governance and for which regulatory capital requirement is more binding. A comparison of the ex-post performance of bonds acquired by insurance companies shows no outperformance, but higher systematic risk and volatility.
|Date of creation:||Mar 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Albert H. Cox Jr, 1967. "Regulation Of Interest On Deposits: An Historical Review," Journal of Finance, American Finance Association, vol. 22(2), pages 274-296, 05.
- Gary S. Becker, 1968.
"Crime and Punishment: An Economic Approach,"
Journal of Political Economy,
University of Chicago Press, vol. 76, pages 169.
- Chevalier, Judith & Ellison, Glenn, 1997.
"Risk Taking by Mutual Funds as a Response to Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 105(6), pages 1167-1200, December.
- Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
- Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
- Luboš Pástor & Robert F. Stambaugh, .
"Liquidity Risk and Expected Stock Returns,"
CRSP working papers
531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Pástor, Luboš & Stambaugh, Robert F., 2002. "Liquidity Risk and Expected Stock Returns," CEPR Discussion Papers 3494, C.E.P.R. Discussion Papers.
- Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
- Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
- Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992.
"Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance,"
NBER Working Papers
4015, National Bureau of Economic Research, Inc.
- Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
- Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
- Jennifer Dlugosz & Rudiger Fahlenbrach & Paul Gompers & Andrew Metrick, 2004.
"Large Blocks of Stock: Prevalence, Size, and Measurement,"
NBER Working Papers
10671, National Bureau of Economic Research, Inc.
- Dlugosz, Jennifer & Fahlenbrach, Rudiger & Gompers, Paul & Metrick, Andrew, 2006. "Large blocks of stock: Prevalence, size, and measurement," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 594-618, June.
- Dlugos, Jennifer & Fahlenbrach, Rudiger & Gompers, Paul & Metrick, Andrew, 2005. "Large Blocks of Stock: Prevalence, Size, and Measurement," Working Paper Series 2005-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- 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, 02.
- Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
- Hendrik Bessembinder & Kathleen M. Kahle & William F. Maxwell & Danielle Xu, 2009. "Measuring Abnormal Bond Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4219-4258, October.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18909. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.