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http://ssrn.com/abstract=1362182
 
 

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Regulatory Pressure and Fire Sales in the Corporate Bond Market


Andrew Ellul


Indiana University - Kelley School of Business - Department of Finance

Chotibhak Jotikasthira


University of North Carolina Kenan-Flagler Business School

Christian T. Lundblad


University of North Carolina Kenan-Flagler Business School

October 4, 2010

AFA 2011 Denver Meetings Paper

Abstract:     
This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. Regulations either prohibit or impose large capital requirements on the holdings of speculative-grade bonds. As insurance companies hold over one third of all outstanding investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties and associated bargaining power. Using insurance company transaction data from 2001-2005, we find that insurance companies that are relatively more constrained by regulation are, on average, more likely to sell downgraded bonds. While many bonds do not exhibit a strong price response to the downgrade, those bonds subject to a high probability of regulatory-induced selling exhibit significant price declines and subsequent reversals. These price effects appear larger during periods in which insurance companies as a group are relatively more distressed and when other potential buyers’ capital is relatively scarce.

Number of Pages in PDF File: 55

Keywords: Fire sales, Regulation, Price pressure, Liquidity, Corporate bonds, Insurance companies

JEL Classification: G11, G12, G14, G18, G22

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Date posted: March 19, 2009 ; Last revised: May 12, 2014

Suggested Citation

Ellul, Andrew and Jotikasthira, Chotibhak and Lundblad, Christian T., Regulatory Pressure and Fire Sales in the Corporate Bond Market (October 4, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1362182 or http://dx.doi.org/10.2139/ssrn.1362182

Contact Information

Andrew Ellul
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Chotibhak Jotikasthira (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
Chapel Hill, NC 27599-3490
United States

Christian T. Lundblad
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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