Risk Overhang and Market Behavior

Posted: 12 Feb 2001

See all articles by Anne Gron

Anne Gron

Northwestern University - Kellogg School of Management

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

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Abstract

We show that exposure from past business transactions ? risk overhang ? can reduce activity in related business lines, sometimes to the point where no new trade occurs. We focus primarily on the role of overhang in nonlife insurance market disruptions. Our model predicts that the relative impact, duration, and character of supply disruptions are related to the extent of overhang. These predictions are consistent with differences between the mid-1980s liability insurance crisis and the early-1990s catastrophe reinsurance crisis. The overhang model predicts attributes of these crises that prior explanations relying on adverse selection do not. We also discuss applications of the overhang model to disruptions in lending and securities markets.

Keywords: Insurance, insurance crisis, financial crisis, risk overhang, risk management

JEL Classification: D45, G20, G22, L10

Suggested Citation

Gron, Anne and Winton, Andrew, Risk Overhang and Market Behavior. Journal of Business. Available at SSRN: https://ssrn.com/abstract=253312

Anne Gron

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Management and Strategy
Evanston, IL 60208
United States
847-491-8687 (Phone)
847-467-1777 (Fax)

Andrew Winton (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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