Rainy Day Liquidity

Abstract

This study considers the role of life insurers as "rainy day" liquidity providers who help improve liquidity in stressful conditions. We show that on average insurers have positive liquidity supply scores in years following the 2007-09 financial crisis and that such positive liquidity supply scores are mainly driven by insurers' buy-side transactions. Cross sectionally, liquidity supply scores of individual insurers are higher for insurers with sufficient capital and high cash flow. We also find that in stressful periods such as the financial crisis and Dodd-Frank Act era, corporate bonds purchased more by high liquidity supply score insurers indeed experience liquidity improvement. In addition, high liquidity provision insurers are more likely to purchase downgraded bonds including fallen angels.

Keywords: Liquidity provision, Market liquidity, Corporate bonds, Funding liquidity, Life insurance

JEL Classification: G11, G22