Longevity Shocks and Corporate Debt Markets

70 Pages Posted: 2 Aug 2021 Last revised: 27 Mar 2024

See all articles by Zhanhui Chen

Zhanhui Chen

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Vidhan K. Goyal

Hong Kong University of Science and Technology

Pingyi Lou

Fudan University - School of Economics

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

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

Suggested Citation

Chen, Zhanhui and Goyal, Vidhan K. and Lou, Pingyi and Zhu, Wenjun, Longevity Shocks and Corporate Debt Markets (March 19, 2024). HKUST Business School Research Paper , Nanyang Business School Research Paper No. 21-35, Available at SSRN: https://ssrn.com/abstract=3896198 or http://dx.doi.org/10.2139/ssrn.3896198

Zhanhui Chen

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science and Technology ( email )

Clear Water Bay
School of Business and Management
Kowloon
Hong Kong
23587678 (Phone)

HOME PAGE: http://www.vidhangoyal.com

Pingyi Lou

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/plou002/home

Wenjun Zhu

Nanyang Business School, Nanyang Technological University ( email )

91 Nanyang Avenue
Singapore, 639956
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

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