In Search of Habitat

59 Pages Posted: 19 Apr 2012 Last revised: 16 Dec 2013

Xuanjuan Chen

Shanghai University of Finance and Economics

Zhenzhen Sun

Siena College - School of Business

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Tong Yu

University of Cincinnati

Date Written: December 2013

Abstract

We perform portfolio level analysis to trace the preferred habitat investment behavior in the government bond market. With a preferred habitat, investors would have an inelastic demand to bonds at given horizons. This is confirmed by the empirical evidence that the aggregate portfolios of insurance firms exhibit restrained elasticities to interest rate changes. We further investigate two forms of habitat --- a liability habitat driven by the need to immunize the interest rate risk of operating liabilities, and a horizon habitat due to the preference for holding securities with riskfree returns for the investment horizon. Consistent with the two effects, we fnd that insurers' portfolio interest rate risk is strongly related to that of the operating liabilities, and that the size of liability and risk aversion dampen insurers' portfolio response to term structure changes.

Suggested Citation

Chen, Xuanjuan and Sun, Zhenzhen and Yao, Tong and Yu, Tong, In Search of Habitat (December 2013). Available at SSRN: https://ssrn.com/abstract=2042648 or http://dx.doi.org/10.2139/ssrn.2042648

Xuanjuan Chen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Zhenzhen Sun

Siena College - School of Business ( email )

515 Loudon Road
Loudonville, NY 12110
United States
518-782-6830 (Phone)

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yu

University of Cincinnati ( email )

P.O. Box 210195
Cincinnati, OH 45221-0195
United States
4019548606 (Phone)
4019548606 (Fax)

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