Working Paper: NBER ID: w29679
Authors: Ralph S. J. Koijen; Motohiro Yogo
Abstract: Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing model with leverage-constrained households and institutional investors. Insurers have relatively cheap access to leverage through their underwriting activity. They hold a leveraged portfolio of low-beta assets in equilibrium, relaxing other investors’ leverage constraints. The model explains recent empirical findings on insurers’ portfolio choice and its impact on asset prices.
Keywords: corporate bonds; insurers; asset pricing; leverage constraints
JEL Codes: G12; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| leverage constraints of households and other institutional investors (G51) | insurers' portfolio choices (G52) |
| leverage constraints (D20) | investment in corporate bonds (G30) |
| allocation to corporate bonds (G12) | credit risk mismatch (G21) |
| insurers' liabilities (G22) | credit risk mismatch (G21) |
| leverage constraints (D20) | positive alpha from low-beta assets (G12) |