Working Paper: NBER ID: w24973
Authors: Gabriel Chodorow-Reich; Andra Ghent; Valentin Haddad
Abstract: We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We demonstrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 15 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.
Keywords: Asset Insulators; Financial Institutions; Life Insurance Companies; Market Fluctuations
JEL Codes: G01; G1; G14; G22; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset value changes (G32) | equity responses (D63) |
| asset value declines (G32) | equity losses (G32) |
| financial health deterioration (G32) | increase in passthrough during crisis (H12) |
| asset insulation activities (G22) | market equity of life insurers (G22) |
| financial institutions (life insurers) (G23) | asset insulators (L94) |