In Search of Habitat
72 Pages Posted: 19 Apr 2012 Last revised: 4 Jun 2021
Date Written: December 1, 2013
We perform portfolio-level analysis to understand insurance firms' preferred-habitat behavior in the government bond market. Based on portfolio durations and portfolio weights across maturities, we find that individual insurers' interest rate risk exposures and portfolio elasticities are related to characteristics of operating liabilities and corporate financing constraints. We show that such habitat behavior has a significant impact on bond pricing -- during the "quantitative easing" era, the bond purchases by the Federal Reserve have a larger impact on the yields of Treasury bonds with a higher habitat demand.
Keywords: Preferred habitat; bond yield; quantitative easing
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