Asset Insulators

57 Pages Posted: 19 Jul 2016 Last revised: 2 Oct 2016

Gabriel Chodorow-Reich

Harvard University Department of Economics

Andra C. Ghent

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Valentin Haddad

Princeton University - Bendheim Center for Finance

Date Written: May 28, 2016

Abstract

We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We illustrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 10 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.

JEL Classification: G01, G11, G22, G23

Suggested Citation

Chodorow-Reich, Gabriel and Ghent, Andra C. and Haddad, Valentin, Asset Insulators (May 28, 2016). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=2810553

Gabriel Chodorow-Reich

Harvard University Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
6174963226 (Phone)
6174963226 (Fax)

HOME PAGE: http://scholar.harvard.edu/chodorow-reich

Andra C. Ghent (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Valentin Haddad

Princeton University - Bendheim Center for Finance ( email )

United States

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