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

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 sal...

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Bibliographic Details
Published inJournal of financial and quantitative analysis Vol. 54; no. 6; pp. 2543 - 2574
Main Authors Nanda, Vikram, Wu, Wei, Zhou, Xing (Alex)
Format Journal Article
LanguageEnglish
Published Seattle Cambridge University Press 01.12.2019
Subjects
Bond markets
Bond ratings
Capital
Clustering
Collateral
Companies
Corporate bonds
Credit risk
Economic crisis
Institutional investments
Insurance commissioners
Insurance companies
Insurance industry
International finance
Investment policy
Investments
Quantitative analysis
Regulation of financial institutions
Sales
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Summary: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, the 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 insurer clustering on bond yield spreads is more evident for bonds held to a greater extent by capital-constrained insurance companies, those with ratings closer to National Association of Insurance Commissioners risk categories with larger capital requirements, and during the financial crisis.
Bibliography:ObjectType-Article-1
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ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109018001515