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http://ssrn.com/abstract=1362190
 
 

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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

February 28, 2011

Journal of Financial Economics (JFE), Vol. 101, No. 3, 2011

Abstract:     
This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers’ capital is scarce.

Number of Pages in PDF File: 54

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 22, 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 (February 28, 2011). Journal of Financial Economics (JFE), Vol. 101, No. 3, 2011. Available at SSRN: http://ssrn.com/abstract=1362190 or http://dx.doi.org/10.2139/ssrn.1362190

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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