Author : Yifan Yu
Release : 2021
Genre :
Kind : eBook
Book Rating : /5 ( reviews)
Book Synopsis Essays on Institutional Investors in the Bond Market by : Yifan Yu
Download or read book Essays on Institutional Investors in the Bond Market written by Yifan Yu. This book was released on 2021. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three chapters on institutional investors in bond market. Chapter 1 examines duration hedging behavior in corporate bond market by studying investment decisions of life insurance companies, the largest institutional investors in this market. I find that life insurers are tilting their corporate bond portfolios towards bonds with higher duration as interest rates decrease to historical lows since the 2008 financial crisis. This hunt-for-duration behavior is due to life insurers' interest rate risk hedging to ensure better duration matching between their assets and liabilities. I further show that hunt-for-duration by life insurers can drive overpricing of corporate bonds when negative monetary policy surprises hit. Chapter 2 investigates how the risk-based capital (RBC) reform in insurance industry initiated in year 1993 affects life insurers' investment behavior in corporate bonds, and how RBC-induced distortion in insurers' investment practices could have an impact on credit allocation, and ultimately real investment in the economy. Following the reform, I observe that insurers tilt their portfolios towards the lowest rated corporate bonds within a bond risk category defined by the RBC rule. Through shifting insurers' bond demand, I find that the RBC reform changes the credit supply conditions to a particular group of firms: those that have credit ratings barely fitting into a low-risk category and belong to industries where insurers hold more corporate bonds before the reform. Furthermore, I find that these firms take advantage of the more favorable credit allocation conditions to increase investment and employment after the reform. These results highlight a channel through which regulatory reform in insurance industry can bear real consequences.Chapter 3 studies whether life insurers rebalance their bond portfolios during Quantitative Easing (QE) programs initiated by the Federal Reserve (Fed) since the 2008 financial crisis. I find that life insurers sell QE securities and replace them with corporate bonds over certain QE periods. Moreover, life insurers rebalance toward corporate bonds in the lowest rating tier within a risk category defined by the RBC rule under which insurers are regulated. Overall, these findings show that QE's portfolio rebalancing channel can work through the life insurance sector.
