Longevity Shocks and Corporate Debt Markets
70 Pages Posted: 2 Aug 2021 Last revised: 27 Mar 2024
Date Written: March 19, 2024
Abstract
This paper explores how longevity shocks transmit to corporate debt markets. We show that changes in life expectancy propagate to corporate debt via life insurers through their adjustment of the duration of their corporate bond holdings to match the duration of their liabilities. Life insurers demand more long-term bonds when longevity increases unexpectedly. Their demand of bonds of specific maturities affects corporate term spreads. Corporations exploit the predictable variation in term spreads by adjusting new debt maturities in response to longevity shocks. The debt response is concentrated among insurer-dependent firms and those with investment-grade ratings, which life insurers prefer.
Keywords: debt maturity, duration risk, bond yields, longevity risk, life insurance companies
JEL Classification: G12, G22, G32, J11
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